Is going green incompatible with the bottom line? Not necessarily. In fact, since the signing of the Energy Policy Act of 2005, your business can accelerate significant tax deductions by going green.
The Energy Policy Act of 2005 established a tax deduction for commercial build
ings that reduce annual energy and power consumption. The deduction is available to a taxpayer for part or all of the cost of energy-efficient property that is installed in new or existing commercial buildings.
The energy-efficient property, however, must be placed in service before Dec. 31, 2008, unless Congress extends the tax deduction, which was done once before.
Under the Energy Policy Act, energyefficient property is defined as depreciable property that is:
installed on or in any commercial building in the United States;
installed as part of the interior lighting systems; the heating, cooling, ventilation, and hot water systems; or a building’s envelope; and
certified as reducing the total annual energy and power costs with respect to the combined usage of the building’s heating, cooling, ventilation, hot water and interior lighting systems by 50 percent or more when compared to a specified baseline.
The tax deduction equals the costs incurred for energy-efficient property, with a maximum deduction of $1.80 per square footage of the building within which the energy-efficient property is placed.
Accordingly, whether you are constructing a new facility or are upgrading an existing facility, your business can accelerate significant tax deductions by going green. For instance, assume that ABC Corp. needs to upgrade an existing 10,000 square foot facility and, as part of the renovation, decides to retrofit the existing facility with energy-efficient property.
Under the terms of the Energy Policy Act, ABC is allowed a tax deduction of up to $18,000 given the square footage of its existing facility ($1.80 per-square-foot maximum deduction multiplied by 10,000 square feet).
Because ABC upgraded its facility with energy-efficient property, it is allowed to deduct the cost of that property from its overall taxable income for the current tax year. Assuming the cost of its energy-efficient property is $10,000, and further assuming a marginal tax rate for ABC Corp. of 35 percent, ABC.’s overall taxable income for the year is reduced by $3,500 and the net cost of the energy-efficient upgrade is $6,500 (the $10,000 initial cost less the tax savings of $3,500).
Further, because ABC has only used $10,000 of the $18,000 deduction permitted by the Energy Policy Act, it is allowed $8,000 in additional deductions for future costs incurred for energy-efficient property (assuming that Congress once again extends deduction).
Absent the commercial buildings tax deduction, ABC would have capitalized the cost of the property and deducted that amount over several years. In contrast, under the terms of the Energy Policy Act, ABC accelerates the deduction into the current tax year, thereby allowing ABC a further benefit-namely, the time value of its money. If, however, the cost of energyefficient equipment exceeds the cost of normal equipment by an amount in excess of the time value of money benefit, then “going green” is not, in this instance, consistent with the bottom line.
Before a deduction can be claimed, the taxpayer must get certification with respect to the energy savings from engineers or contractors licensed in the jurisdiction.
It should be noted that when a buildings deduction is taken, the property’s basis is reduced by an amount equal to the deduction, resulting in lower depreciation deductions over the life of the property.
Finally, partial deductions are allowed for the costs incurred for energy-efficient property that saves at least 16 percent in power consumption through improve
ments to any one of a building’s subsystems-lighting, heating, cooling, etc.
By retrofitting or constructing in an energy-efficient way, you not only earn a tax deduction, thereby reducing your overall taxable income, and realize the time value of your money, but you also achieve lower operating costs. Accordingly, going green is not necessarily incompatible with the bottom line.
Deveau is a director and shareholder at the Indianapolis law firm of Sommer Barnard PC. Contributing writer Dave Guevara is an associate with the firm. Views expressed here are the writers’.