Tax strategy. Sometimes it's a part of the business that just doesn't receive the respect it deserves. However, for companies looking to manage both energy use and the bottom line, it should be an important element of business strategy.
On a daily basis, on websites such as GreenBiz.com, we read about the energy management efforts being implemented by companies. Generally, such efforts are guided by at least one of four business drivers: revenue generation, cost reduction, stakeholder expectations and/or government regulation. These efforts themselves tend to focus on one of four categories:
- Reducing the carbon intensity of supply chain operations through energy efficiency,
- Switching to low-carbon energy and fuel sources,
- Innovating new solutions, or
- Offsetting carbon emissions (see graphic on last page).
When you start to examine the lucrative opportunities the tax function can unlock, the financial prospects certainly command respect. Take Internal Revenue Code §179D, for example. More commonly known as the §179D "Deduction for Energy Efficient Commercial Buildings," it's a great example of how tax deductions can act as a "cost reduction" business driver for companies as they reduce carbon emissions by better managing energy use.
With the U.S. Department of Energy estimating building energy consumption to be 40 percent of total domestic energy use, as part of their sustainability strategies, architects and engineers are assisting their clients in reducing energy consumption at corporate facilities.
In addition to incentives offered by utilities and state governments, the 179D deduction is an excellent opportunity to further recoup the financial benefits of retrofitting properties with more energy efficient alternatives, or of installing property in a newly constructed facility.
What is the 179D Deduction?
IRC §179D offers a tax deduction for the cost of eligible energy-efficient commercial building properties, namely for:
- Interior lighting systems (fixtures and controls),
- Building envelope (walls, windows, roofs or doors),
- And/or HVAC (heating, ventilation and air conditioning) systems.
Originally introduced as part of the Energy Policy Act of 2005, and later extended under the Emergency Economic Stabilization Act of 2008, 179D permits a deduction between $0.30 and $1.80 per square foot of the facility, up to the total cost of the energy-efficient property placed in service. The deduction value depends on the property's performance against ASHRAE (American Society of Heating, Refrigerating and Air-Conditioning Engineers) Standard 90.1-2001. The 179D deduction applies to property placed in service between January 1, 2006 and December 31, 2013.
The most common application of 179D may be for lighting alone. In 2006, the Internal Revenue Service (IRS) published Notice 2006-52, allowing for a deduction between $0.30 and $0.60 per square foot, solely under the lighting qualification pathway.
More specifically, by achieving an LPD (Lighting Power Density, measured in watts per square foot) reduction between 25 percent and 40 percent of the ASHRAE standard, a facility is eligible for a deduction between $0.30 and $0.60 per square foot under lighting alone. It may sound small, but this deduction can really add up at large commercial properties.
And of course, a facility may be eligible for a higher deduction by combining the performance of multiple building systems, such as lighting and the building envelope or HVAC system, for example.
Next page: How companies can take advantage of this opportunity