A section of the federal government’s Internal Revenue Code that could potentially garner commercial property owners hundreds of thousands of dollars in energy efficiency tax deductions is slated to expire in 2013, with no new incentive program yet planned to replace it.
But even though the code – Internal Revenue Code Section 179D – is scheduled to expire in a couple years, those deductions could increase in the meantime by more than 50 percent if the American Institute of Architects (AIA) has its way.
Currently, owners of larger properties that meet energy efficiency standards specified by the IRS could see six-figure savings for implementing energy-saving retrofits. To qualify for the deduction, retrofits must save at least 50 percent of the power and energy costs of a hypothetical building meeting the government’s standards.
The deductions are available to all commercial property owners. However, the owners of public buildings like schools are not eligible. In that case, those owners can turn the deductions over to the architects and engineers that design and implement the energy efficiency upgrades.
Deductions Vs. Credits
Take Cambridge-based HMFH Architects’ recent renovation of a 105,000-square-foot charter school. They gutted the building, installed entirely new HVAC and electrical systems and upgraded the building envelope. Then they had some engineers test all those systems to see if they were eligible for any deductions through Section 179D.
Turns out, the upgrades made the building, and thus the architects, eligible for $189,000 in tax deductions.
“It’s a benefit to the firm and helps to justify the extra effort it takes for making the buildings more energy-efficient, which we don’t always get compensated for,” said Philip Lewis, a principal with HMF.
Now, the AIA is lobbying hard in Congress to increase the current $1.80 per-square-foot deduction to $3 – a 66 percent bump.
AIA representatives maintain that the deductions have been a very valuable tool for property owners who wish to include upgrades when performing renovations.
“We feel that at a time when the design and construction industries have been decimated by the economy … energy efficiency not only reduces our nation’s dependence on foreign oil and lowers our energy bills, but it also creates jobs,” said John Nunnari, executive director of AIA Massachusetts.
President Barack Obama recently got into the mix with the Better Buildings Initiative, announced in early February. Among other means of making commercial buildings more energy efficient, his proposal would alter the tax deduction and convert it to a true tax credit – which has more value because it’s a one-for-one tax reduction. The tax deduction, which Section 179D now offers, only serves to reduce a property owner’s taxable income.
A bipartisan group in Congress is currently developing legislation to strengthen 179D and mulling whether it would be more beneficial to increase the dollar amount or to convert the deduction to a tax credit, said Andrew Goldberg, AIA’s senior director of federal relations.
Still Expensive
Those developments have the potential to persuade more commercial property owners to utilize the deductions. The current code is just not enough of an incentive for an owner to undertake costly retrofits for their sake alone, said David Begelfer, chief executive officer for NAIOP Massachusetts.
“If you’re an owner and planning a major renovation for energy purposes, this is a possibility, although the standard you have to meet is quite high,” Begelfer told Banker & Tradesman. “The tax deduction is nice, but it’s not going to do the trick on its own. You really need to have someone that’s committed to going beyond the value for marketing purposes, and what they consider the payback for energy efficiency.
“You’re asking for a fairly substantial change [in a building’s efficiency], which will be fairly substantial in cost,” he added. “These days, to make those kinds of investments, I’m not sure you’re going to see a return on them right now … when rents are so low, unless you are trying to market your energy efficiency. You don’t get that kind of energy efficiency by just doing minor caulking. It’s just not enough … incentive for an owner to do it.”
And the basic equipment upgrade costs aren’t the only barriers to eligibility for the tax deductions. Specially trained engineers will need to test and calculate what work was done by comparing the retrofits to a computer model of a recreated hypothetical building to see if the upgrades equal a 50 percent increase in efficiency to that hypothetical structure.
Owners can choose to test only one of the building’s systems, or all three – HVAC, electrical and the building envelope. Depending on the size and scope of the building, fees can run between $2,500 and $3,500 for each system test, said Jeffrey Hiat, director of new business development for New York-based MS Consultants, which performs the tests. For a 100,000-square-foot building, it would cost about $10,000 to test the entire structure, for a maximum of approximately $180,000 in potential deductions.
