Since 2003 the number of cities with Green Building programs has risen by 418%.
American cities are going green and local leaders are charging ahead with innovative sustainability policies. Buildings currently account for close to one-half of all greenhouse gas emissions, and the design and construction of Green Buildings offers the opportunity to create a more sustainable future.
According to a survey report by the U.S. Conference of Mayors, nine out of ten cities anticipate requiring in the next year that new city buildings be energy efficient, healthy and environmentally sustainable. Forward-looking cities are adopting Green Building Standards to provide for long term operating cost savings, to facilitate positive results for the environment, occupant health, and to practice leadership by example.
Building construction and operation requires vast amounts of resources. A study by the World Watch Institute suggests that these activities account for one-sixth of the world’s fresh water withdrawals, one quarter of its wood harvest, and 40 percent of its material and energy flows. Green Building techniques make more effective use of these resources and reduce the environmental impact of structures over their lifetime.
The American Institute of Architects reports that the U.S. building design, construction, materials, and operation consume more energy than any other part of the economy. U.S. buildings produce as much carbon emission as does the entire economies of Japan, France, and the United Kingdom combined. Additionally, 76% of all power plant generated electricity is used to operate buildings globally.
Capital E findings indicate that average savings of Green Buildings are substantial: 50-90% decrease in waste cost savings; 30-50% decrease in water use savings; 35% decrease in carbon savings; and, a 30% decrease in energy savings.
More and more, Green Building ordinances are requiring that all new construction and building improvements meet certain energy, water, roofing, and lighting efficiency thresholds. For instance, the city of Dallas recently and unanimously voted to implement numerous Green Building regulations: Commercial buildings with less than 50,000 square feet will be required to be 15% more energy efficient and use 20% less water; and, buildings with more than 50,000 square feet will be required to meet strict LEED (Leadership in Energy and Environmental Design) standards. Dallas’ Green Building ordinances most likely will serve as a model for cities across the nation.
What is a Green Building?
A Green Building is any structure that is built, renovated, or operated in an environmentally friendly fashion. This characterization is broad, but there are several specific standards that help define which buildings qualify as green. These standards typically focus on the following areas:
* Site design
* Water efficiency
* Energy efficiency
* Materials
* Indoor environmental quality
A building exhibiting a combination of these benefits may qualify for various levels of certification and tax deductions. The U.S. Green Building Council recently released the most widely accepted standard known as LEED.
Benefits of Green Building:
The goal of Green Building is to lessen the impact of a structure on the environment while improving the quality of life for its occupants. Some benefits are easy to economically quantify, such as reduced water and energy consumption. Often, the savings from these features over the life of the building will more than pay for the initial cost. Improved occupant health, increased productivity, reduced storm-water runoff and the use of recycled and sustainably harvested products are more difficult to assess financially. Since not all Green Buildings need to be built to the same level of certification, it is possible to construct a legitimate Green Building at little or no additional cost.
Section 179D Green Building Tax Deduction Overview:
The Code section 179D deduction applies to new buildings that meet certain energy savings targets and requires the involvement of licensed engineers or contractors. SourceCorp Professional Services is a qualified, experienced, and licensed Green Building 179D Study provider and can determine whether your clients qualify for this new deduction.
What is the Code Section 179D Deduction?
The Energy Policy Act of 2005 added section 179D to the Internal Revenue Code. Section 179D permits a deduction for the costs of installing certain energy efficient building systems in commercial buildings. For the deduction to apply, qualifying energy efficient building property must meet six general requirements:
(1) The property is depreciable
(2) The property is placed in service after December 31, 2005 and before January 1, 2009 (which is most likely being extended through 2012)
(3) The property is installed in or on a building located in the United States
(4) The building is within the scope of Standard 90.1-2001, which deals with energy efficiency guidelines
(5) The property is installed as part of the interior lighting systems, the HVAC and hot water systems, or the building envelope; and,
(6) An unrelated and qualified party certifies that the property will reduce the total annual energy and power costs by 50% compared to a reference building.
The deduction is for the cost of the qualifying energy efficient property, but it is capped at $1.80 times the square footage of the building, including mezzanines and other intermediate floors (there are also reduced deductions available for partially qualifying property). For example, if a taxpayer places into service $500,000 of qualifying energy efficient building property in 2006 and has a 100,000 square foot building, the deduction is limited to $180,000. On the other hand, if the taxpayer had only placed in service $150,000 of qualifying energy efficient building property, then the taxpayer would have been allowed a deduction of $150,000.
To claim the deduction, a taxpayer must have a qualified individual (either an engineer or a contractor licensed in the same jurisdiction as the building) perform a field inspection of the building. They then must use qualified software from the Treasury Department’s list of certified software to calculate the energy savings. Finally, a qualified individual must certify the results.
How the Deduction Works:
The section 179D energy efficient commercial buildings deduction allows taxpayers to deduct the cost of their fully or partially qualifying property, up to a cap. The cap is different for fully and partially qualifying property. Generally, the deduction is available if the interior lighting systems; the heating, cooling, ventilation, and hot water systems; and, the building envelope reduce the total annual energy and power costs for the building’s heating, cooling, ventilation, hot water, and interior lighting systems by a certain percentage compared to a Reference Building that meets the minimum requirements of Standard 90.1-2001. There is also an interim rule for lighting that allows a partial deduction if the lighting achieves a power density reduction of at least 25%, (50% in the case of warehouses), and meets certain other requirements. Except in the case of the interim lighting rule, the building’s power consumption must be compared to a reference building.
A reference building is a hypothetical building of the same type in the same area that meets the standard’s minimum requirements as of April 2, 2003. Standard 90.1-2001 is the Energy Standard for Buildings Except Low-Rise Residential Buildings. It is published by ANSI, ASHRAE, and IESNA, which are three standard-setting bodies. Since the standard is several years old, many places have minimum building requirements that already meet or surpass the energy saving requirements or that provide tax credits or exemptions for qualifying buildings. New York and California are popular examples of places where many buildings meet the standard.
A building meets the requirements for the full deduction if the interior lighting systems; the heating, cooling, ventilation, and hot water systems; and, the building envelope reduce the total annual energy and power costs for the building’s heating, cooling, ventilation, hot water, and interior lighting systems by 50% or more compared to a reference building that meets the minimum requirements of Standard 90.1-2001. Originally, a system would qualify for the partial deduction if it similarly reduced the total annual energy and power costs by at least 16-2/3% compared to the reference building. Recently, the IRS clarified that they will accept different qualifying percentages for the partial deduction. The building envelope may meet a 10% power and energy cost reduction to be eligible for the partial deduction. Both the lighting system and the cooling, heating, ventilation, and hot water systems may meet a 20% power and energy cost reduction to qualify for the partial deduction. These alternate percentages will not become mandatory until after December 31, 2008 at the earliest.
Green Building Study Approach:
First, your client needs to provide detailed specifications for the building. In some situations, due to the applicable local building codes or industry building standards, a thorough review may not be necessary to move forward to with a section 179D study. For example, LEED Gold-certified buildings generally would not require a review of the building specifications to determine if it qualified for the deduction because the building almost invariably would meet the energy savings targets. In this situation, SourceCorp would only review the specifications during the actual study.
After preliminary review of the specifications, we determine whether the building would qualify in whole or in part. After obtaining any necessary licenses in the building’s local jurisdiction, a professional engineer would perform the energy modeling and analysis and schedule a site visit. The energy modeling may not occur until after the site visit depending on the level of detail available in the plans. Detail is frequently lacking in situations where the taxpayer acted as its own general contractor. Regardless, during the site visit, our engineer would follow the NREL standard guides and checklists to verify that the property meets the energy savings targets and gather any additional information not included in the plans.
We then finalize the section 179D study and provide the building owner with an overview of the energy saving features.
After we provide the certification of the qualifying energy efficient property, our cost segregation personnel become involved in the process. The certification process for Code section 179D only determines whether the deduction is available. The certification process does not involve determining the cost of the qualifying energy efficient property. Our regular cost segregation personnel:
(1) Use industry-standard cost estimation techniques to determine the cost of the qualifying energy efficient property;
(2) Integrate the section 179D study findings into the cost segregation report.
Our cost segregation personnel determine the cost basis of the qualifying property and determine the applicable cap on the deduction. For the full deduction, the cap is $1.80 times the building’s square footage. For the partial deduction, the cap is reduced to $0.60 times the building’s square footage. If all of the qualifying property’s cost bases are less than the cap, they are deducted in full. If their cost exceeds the cap, their pro-rata basis up to the cap is deducted and the remaining basis is depreciated as appropriate.
Where possible, the engineer that performs the site visit will also be able to perform the cost segregation analysis of the building. In some situations, the engineer may work in tandem with another cost segregation consultant on larger or unusual properties. Alternatively, your client’s in-house contractor or professional engineer may be able to perform the site visit and then we could send only a cost segregation consultant for a site visit. After finalizing the cost segregation report, we will ship a hardcopy of the cost segregation report and the section 179D study to your client.
Audit Support:
Under our standard agreement, we provide 40 hours of audit support. We anticipate that the section 179D study will involve a minimal level of audit support because we can provide the agent with the study and discuss any questions the agent might have. As necessary, we would file a Form 8821 to be able to discuss the study with the agent. If the combined section 179D study and cost segregation report require additional audit support, we can file a Form 2848 and work with you on providing the best audit defense for your client.
Because the Code section 179D deduction applies to new buildings that meet certain energy savings targets and requires the involvement of licensed engineers or contractors, you may not have known where to turn to for help with this new deduction. The SourceCorp Green Building Service team is comprised of full-time, highly experienced and licensed 179D professionals. We can help maximize your client’s deductions and limit their exposure.
For more information on providing your clients with Green Building 179D Tax Deductions, to schedule a Green Building CPE Lunch & Learn, or to receive a free copy of SourceCorp’s Green Building 179D Energy Efficiency Overview please visit SourceCorp.
About SourceCorp:
Celebrating their 25th year in business, SourceCorp Professional Services is the leading provider of specialized tax services in North America. Headquartered in Fort Worth, Texas, SourceCorp empowers accounting firms by providing LIFO Accounting, R&D Tax Credit Studies, Cost Segregation Studies, and Green Building 179D Energy Efficiency Studies. With a specialized staff of more than 50 full-time professionals and with offices located throughout the country, accounting firms realize unparalleled experience, reliability, and trust. SourceCorp serves many of the nation’s most prominent CPA firms, Associations, and Fortune 1000 companies.
Sources:
Scientific American September 2006
American Institute of Architects
U.S. Green Building Council
Capital E
Energy Policy Act of 2005 section 179D Internal Revenue Code
Captial E Greening America’s Schools October 2006
Gensler 2006
City of Dallas Green Initiative
Survey report by the U.S. Conference of Mayors
