Going Green With Recent Legislation

8/14/2019 Going Green With Recent Legislation

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Going Green With Recent

LegislatDoes It Make Business Cents?

By Ryan N. Rhed, CPA

18 Taxation • Disclosures • March/April



Congress and the White House have been busysince October 2008 attempting to provide busi-ness owners with tax and other incentives to

build in a more energy efcient manner and to produceenergy using renewable methods.

The Energy Improvement and Extension Act o 2008(EIEA) and the American Recovery and ReinvestmentAct (ARRA), passed in February 2009, have extended

and expanded many green incentives. EIEA and ARRAprovide opportunities or business owners to reduce thecost o going green through accelerated tax deductions,tax credits, grants and loan guarantees.

Five (although there are numerous others) notableincentives were extended and/or expanded by the twoacts:

Commercial Building Tax Deduction•

Business Energy Investment Tax Credit•

U.S. Department o Treasury — Renewable•

Energy Grants

U.S. Department o Energy — Loan Guarantee•

Program

Renewable Electricity Production Tax Credit•

Details, detailsIn order to provide a ramework or determining

whether it makes sense to build and/or invest “green,”it is important to understand the general details behind

some o the major incentives.

Commercial Building Tax Deduction

EIEA extended the Commercial Building Tax Deduc-tion rom December 31, 2007, to December 31, 2013.The incentive allows a taxpayer who is an owner or lesseeo a commercial building to take a one-time accelerateddeduction (as opposed to capitalizing and depreciatingover a much longer useul lie) or the cost or a portiono the cost o energy efcient property installed to thecommercial building’s interior lighting systems, heat-ing, cooling, ventilation, hot water systems and buildingenvelope.

The amount o the deduction is based on the squareootage o the building oor area (not to exceed the ac-tual cost o the improvement). Accelerated deductionso $1.80 per square oot are given or buildings thatachieve a 50 percent or greater reduction in energy andpower costs.

Smaller accelerated deductions o $.60 per squareoot are allowed at lower energy saving percentagesdepending on the type o property installed. The threeprimary systems eligible or the smaller deduction areinterior lighting systems, HVAC systems and the build-ing envelope. In order to receive this accelerated w

on:

Taxation • Disclosures • March/April 19



20 Taxation • Disclosures • March/April

deduction, a certication must be obtainedto veriy the property installed satises theenergy efciency requirements. The certi-cation is generally perormed by a certi-ed engineer using commercially availablesotware.

Business Energy Investment Tax Credit

EIEA and ARRA both expanded theBusiness Energy Investment Tax credit. Ataxpayer who constructs or acquires (i theoriginal use o the property begins with thetaxpayer) depreciable and/or amortizableenergy property is eligible or a credit o up to 30 percent o the basis o the energyproperty placed into service. The credit isreceived in the year in which the property isplaced into service.

The amount (percentage) o the credit is based on the type o energy property placedinto service. For example, energy property

that produces solar energy used to generateelectricity, heat or cool a structure, providesolar process heat, or illuminate the insideo a structure using ber-optic distributedsunlight, is eligible or a 30 percent credit.However, other energy property like quali-ed uel cells, micro-turbines and qualiedsmall wind is eligible or a 10 percent credit.I the credit is claimed on the energy prop-erty placed into service, the basis o thatproperty must be reduced by hal o thecredit claimed.

U.S. Department of Treasury —

Renewable Energy Grants

ARRA allows taxpayers eligible or eitherthe Business Energy Investment Tax Credit(ITC) or the Renewable Electricity Produc-tion Tax Credit (PTC) to receive a grant inlieu o the credits rom the U.S. Departmento Treasury. The grant is equal to 10 percentor 30 percent o the basis o the property,depending on the type o property.

To be eligible or the grant, property mustgenerally be placed into service between

January 1, 2009, and December 31, 2010.Grant applications, by and large, must besubmitted no later than October 1, 2011.Payment o the grant will be made within60 days o the application date or the dateproperty is placed into service, whicheveris later.

It is very important to note that onlytax-paying entities are usually eligible orthis grant, but there are several specic ex-clusions in Treasury guidance. In addition,the basis o the energy property placed into

service must be reduced by 50 percent o thegrant payment received.

U.S. Department of Energy —

Loan Guarantee Program

The incentive was originally oered underthe Energy Policy Act o 2005, which autho-rized the U.S. Department o Energy (DOE)

to issue loan guarantees or projects that“avoid, reduce, or sequester air pollutantsor anthropogenic emissions o greenhousegases” and “employ new or signiicantlyimproved technologies as compared to tech-nologies in service in the United States at thetime the guarantee is issued.” The 2005 actwas authorized to oer more than $10 billionin loan guarantees, but was set to expire inSeptember 2009.

ARRA extended the authority o the DOEto continue to issue loan guarantees until Sep-tember 30, 2011, and allocated an additional

$6 billion to the initiative. ARRA expandedthe types o projects that were eligible orthe loan guarantee to include:

Renewable energy systems•

Electric power transmission•

systems

Leading edge biouel projects•

Renewable Electricity

Production Tax Credit

The credit is a per kilowatt-hour taxcredit or electricity generated (rom quali-ed energy resources at a qualied acility)and sold by a taxpayer. Qualied energy re-sources include wind, closed-loop biomass,open-loop biomass, geothermal, solar, smallirrigation power, municipal solid waste,qualied hydropower production and marineand hydrokinetic renewable energy.

Although there are many intricacies,generally a credit o 1.5 cents (adjusted orination) per kilowatt-hour produced and

sold is allowed or the rst 10 years ater aqualied acility is originally placed in ser-vice. Currently, the “adjusted or ination”credit amount is 2.1 cents per kilowatt-hour.Most electricity generating acilities must beplaced into service prior to January 1, 2014.The only two exceptions are wind acilities,which must be placed into service prior to January 1, 2013, and solar acilities, whichneeded to have been placed into service priorto January 1, 2006.

In addition to the credit, most solar and

wind acilities placed into service would also be eligible or the tax benet o accelerateddepreciation deductions (ve years) underthe Modied Accelerated Cost-RecoverySystem (MACRS). ARRA also allows a-cilities that qualiy or this credit to elect toreceive the ITC or the U.S. Department o Treasury Renewable Energy Grant in lieu o

this credit. The ITC or grant or PTC-eligibletechnologies is generally equal to 30 percento eligible costs.

Decision time:Invest “green” or not?

Armed with a general understanding onotable ederal tax, grant and loan guaranteeincentive programs as extended and expand-ed by EIEA and ARRA, it is time to decideor advise clients whether it would be a goodnancial business decision to build green.

Some considerations include:

What is the cost o the energy•

efcient property versus the non-energy efcient property?

What type o tax incentives would•

be granted with the installation o energy efcient property (credit,accelerated deduction, grant orloan guarantee)?

What energy savings will be rec-•

ognized through the installation o energy efcient property comparedto the alternative, over the lie o each type o property?

Do the useul lives and/or salvage•

value o each type o property vary?

Are there any qualitative benets•

to owning and running energyefcient property (marketing,advertising, etc.)?

Are there any state tax incentives•

in addition to the ederal incentivesthat would make it more lucrativeto place energy efcient propertyinto service rather than traditional(non-energy efcient) property?

Will there be uture mandates to•

increase the energy efciency o business property?

For example, assume that a business



owner is considering whether to replacethe HVAC system in a commercial buildingwith either a new HVAC system that is notenergy efcient (i.e., a traditional system)or one that is energy efcient. Pertinent as-sumptions are as ollows:

The size o the building is 111,111•

square eet.

The energy efcient system would•

reduce energy and power usage by50 percent and thereore would beeligible or the commercial buildingtax deduction o $200,000 ($1.80times 111,111 square eet).

The cost associated with obtaining•

a certication to be eligible or thecommercial building tax deductionis included as part o the total cost

o the energy efcient system.

The cost o the traditional HVAC•

system is $1 million with a 39-yearuseul lie and no salvage value.

The cost o the energy efcient sys-•

tem is $1.2 million with a 39-yearuseul lie and no salvage value.

The average annual energy cost o •

a traditional system is $100,000($20,000 o which are base costsand $80,000 o which are based on

consumption o energy).

The energy efcient property•

would not reduce the $20,000 o energy base costs.

The business owner has an average•

ederal/state combined tax rate o 40 percent.

Using the assumptions in Table 1, the“breakeven point” is ve years. In addition,the green system would produce many more

years o energy savings over the useul lieo the property. It is important to note thatthe above example ignores state tax incen-tives that could make the result (payback)even shorter. Although the example is verysimplied, it sets orth the ramework or

which business owners and client advisors cananalyze whether to “invest” in energy efcientproperty or uture capital improvements.

Stay tunedWith both parties in Congress ocused on

energy independence and efciency, it seemsreasonable to assume that additional incen-

tives and/or mandates will come “online” inthe near uture.

Ryan N. Rhed, CPA,

is a senior

accountant with

Baker Tilly (ormerly

Beers + Cutler) in

Vienna. The frm has

been providing tax,

assurance and consulting services

or more than 30 years and recently

expanded its practice to ocus onthe analysis o renewable energy

investments. Ryan can be reached

at [email protected] or

(703) 923-8503.

Taxation • Disclosures • March/April 21

Table 1: Calculating the Green CostBreakeven Point: A Basic Framework

Green TraditionalOriginal Cost $1,200,000 $1,000,000

Excess Cost o Green Property $200,000 —

Year 1Tax beneft o commercial building deduction (80,000) —

Energy Savings, net o tax (24,000) —

Year 2Energy Savings, net o tax (24,000) —




Total — —

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Going Green With Recent Legislation