NATIONAL REPORT—Going green can reduce operating costs and can help differentiate you from the competition, but many in the lodging industry are not aware of the significant federal tax benefits available. With ever-increasing energy costs, an unprecedented level of government mandates for green building, heightened demand for green construction, and improvements and better pricing for environmentally sustainable materials, many owners, architects, and facility managers are considering significant updates to save cash.
Sec. 179D of the IRS Code provides a significant deduction for the cost of energy-efficient improvements to commercial property. With an estimated 4.5 million existing commercial properties in the United States and with 14 percent of U.S. cities with populations of at least 50,000 having mandated green standards for new commercial buildings and dozens more poised to follow, the 179D tax deduction could help mitigate the industry average 3 percent to 7 percent cost difference in building green.
If your company owns or leases hotel properties and you have installed or retrofitted the property to be more energy efficient, you may be eligible for a deduction for part or all of the costs associated with the installation or retrofit. In other words, instead of capitalizing and recovering through depreciation over 39 years this allows for potential immediate expensing of costs.
There’s Gold in Your Green Building
The maximum deduction is $1.80 per square foot of building floor area that qualifies under IRC Sec. 179D measured against a reference building. In order to get the full deduction the building has to be 50 percent more efficient than the baseline established by the reference building. The deduction is allowed for prior tax years, including 2006 and 2007, and can include multiple taxpayers. Multiple taxpayers are limited to allocating the $1.80 among the taxpayers. And, if your building does not qualify for the full deduction, it could qualify for a partial deduction. If your building does not meet the 50 percent energy savings, it could still qualify for a 60 cents per square foot deduction if certified to reduce energy costs by at least 16.66 percent.
For example, a building owner constructs a new 120,000-square-foot, three-story hotel that exceeds all ASHRAE reference building comparisons including interior lighting systems, HVAC, hot water systems, and building envelope and gets the full deduction of $1.80 per square foot. The current year deduction comes to $216,000. With a combined state and federal tax rate of 40 percent, the immediate cash value of the deduction would be $85,000. At an 8 percent discount rate the overall net present value building life would be $59,000.
In this example, a building owner retrofits an existing 120,000-square-foot, three-story building and receives a partial deduction of $.60 per square foot by replacing existing lighting systems with high efficiency lights combined with bi-level switching. First year benefit expensing (an additional tax deduction) would be $72,000. At a combined tax rate of 40 percent, the immediate cash value of the deduction would be $28,000. At an 8 percent discount rate the overall net present value building life would be $19,600.
How it Works
If you have constructed a new hotel or reconstructed an existing one and placed the building into service after December 31, 2005 or will place it into service by January 1, 2009 you may be eligible for a deduction. If your building has been or is in the process of becoming LEED Gold or Platinum certified, you’re nearly assured the deduction. And if you haven’t already taken advantage of the deduction your return can be amended for up to three years.
To qualify for a full or partial deduction, the energy-efficient building property must meet the following criteria:
• The building must be located in the United States.
• Installation as part of interior lighting systems, HVAC and hot water systems or the building envelope (insulation, exterior doors, exterior windows, roofing material).
• Certified that installation will reduce total annual energy and power costs by 50 percent or more as compared to American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) Std. 90.1-2001 Reference Building.
• Energy and power consumption calculation based on IRS-approved software programs that compare the subject facility to an ASHRAE Reference Building.
• The property must be certified by an IRS-qualified professional engineer or contractor licensed in the same jurisdiction as the proposed building.
Tax Deduction Eligibility
The person or organization that makes the expenditures for construction is generally the recipient of the allowed tax deductions. This is usually the building owner, but for some HVAC or lighting efficiency projects, it could be the tenant.
Before a taxpayer can claim the section deduction, the taxpayer must obtain a certification (not to be confused with LEED certification) with respect to the property. The certification must be provided by a qualified individual and satisfy the requirements of section 179D(c)(1).
The qualified individual must be properly licensed as a professional engineer or contractor in the jurisdiction in which the building is located, not be “related” to the taxpayer taking the deduction (as defined by the IRS), and represent to the taxpayer in writing that he or she has the requisite qualifications to provide the certification. The certifier must also use IRS-qualified computer software. Software must be on a list of products approved by the U.S. Department of Energy.
The Energy Policy Act of 2005 greatly encourages commercial building energy conservation. In the very near future, the cost of not being green will be far more significant.
Matthew Rader, Director of Green Building 179D Tax Deduction Certification and Cost Segregation Services for SourceCorp., has performed a wide range of studies in industries including hospitality, distribution, financial services, healthcare, high tech, manufacturing, offices, real estate, retailing, restaurants and waste disposal. Celebrating their 25th year in business, SourceCorp specializes in Green Building 179D Tax Deduction Certification, LIFO Accounting, R&D Tax Credit Studies, and Cost Segregation Studies. Click here for more information.
