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Tax Incentives Fund Energy Property Maximize Benefits with Cost Segregation
 
Written by: Karen Koch, CPA, MT
Partner | Bedford Cost Segregation, LLC

Tax incentives related to energy property provide opportunities for businesses to access dollars to fund investments in their real estate. Business owners know the impact that reduced energy consumption can have on their profits and ability to compete in the marketplace. While business owners want to be energy efficient to lower utility costs and increase the value of their building with “green” design, the successful implementation of energy efficient property often comes with a high price tag. Making matters worse, financing dollars are not readily available; cash is short in this economy.

Fortunately, government and utility companies are willing to financially incentivize business owners to conserve energy in a voluntary manner. Government is concerned with the depletion of natural resources, the ability to reduce our carbon footprint and the reduction of greenhouse gases to slow global warming. Utility companies understand the demands of a growing population, estimated to increase by 100 million in 20 years. By offering incentives to the business owner, utility companies are able to delay costly construction of new power plants and research alternative sources of energy. Thus, designing with energy saving property is a financially repeatable economic advantage for businesses that own commercial real estate.

According to Energy Star, energy efficient buildings consume 40% less energy. Investing in energy property puts business owners on the path to making responsible economic and environmental decisions for their business. So where are the dollars?

Energy property can qualify for multiple tax incentives. The definition of energy property under Section 48 has expanded over time. Since the 1986 Recovery Act, energy property included solar, geothermal and wind property as it related to the generation of electricity. In 2006 the Energy Policy Act of 2005 added fuel cells, microturbines and solar hybrid lighting. However, the real impact for the owner of commercial real estate came in October of 2008 with the passing of the Energy Improvement and Extension Act of 2008. Energy property was again expanded to now include geothermal heat pumps, combined heat and power, and small wind.

The focus of this article will illustrate some of the incentives related to installation of energy property and the ability to capture investment dollars.

• First and foremost, depreciable energy property qualifies
for the Business Energy Investment Tax Credit as enacted
under Code § 48
• 30% energy credit for solar, fuel cells and small wind
• 10% credit for geothermal, microturbines, and
combined heat and power systems
• 10% credit for geothermal heat pump property,
effective October 3, 2008
• The amount of the credit is based on the cost basis
of the energy property
• Effective through December 31, 2016
• Taxpayers can apply for a Federal grant in lieu of the tax
credit
• Secretary of Treasury will reimburse owner in
amount not to exceed the limitations stated in Code
§ 48(c), generally the applicable percentage of the basis of such property
• Commissioning report is required to attest all
equipment is installed and used for its intended
purpose
• Grant is paid within 60 days of the application date or
the placed-in-service date of the specified energy
property
• Effective for property placed in service in 2009 or
2010 (after 2010 if construction began during
effective period and grant application must be
received before October 1, 2011)
• Energy property is considered 5-year property for
depreciation purposes
• Currently eligible for bonus depreciation in 2008
and 2009 (depending on Congress, maybe 2010)

Let’s look at an illustration that will illustrate the ordering rules of claiming these benefits;

Taxpayer installs a geothermal heat pump system in a newly constructed warehouse distribution facility. The building is 100,000 SF which includes 10,000 SF of office space and 90,000 SF open warehouse.

This illustration shows that with the application of these tax incentives the taxpayer was able to recover nearly 30% of his investment cost in year one. In addition, this newly constructed property designed with a geothermal heat pump system qualified for the EPAct deduction in both the lighting and HVAC categories. Assuming 90,000 SF to qualify, times $1.20/SF, equals an additional deduction of $108,000 ($37,800 tax savings at the 35% level). With EPAct, the investment is two-thirds funded in the first year.

The keys to maximizing these incentives are (1) up-front design and (2) having enough time to incorporate the benefits of multiple opportunities. A cost segregation study can be used to properly identify the “total system costs” of energy property and ensure you or your clients are taking full advantage of any available dollars. Further, it is important that your cost segregation provider be familiar with the recent rulings on energy property so that they don’t overlook valuable savings by incorrectly allocating costly items to 27.5 or 39-year lives.

The Bottom line is each of these incentives requires specialized expertise in engineering and tax. Contact your Bedford representative today to discover how you can benefit from these valuable incentives and increase your cash flow.

Did you know?
 
Bedford has more Certified Cost Segregation Professionals (CCSPs) than any other provider. The CCSP designation is the highest level of certification available through the American Society of Cost Segregation Professionals.


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