By involving a tax specialist in a project early in the process, the owner can benefit from tax incentives that reduce the higher first costs of better, more efficient systems.

By Michael Ivanovich, The Ivanovich Group LLC, Oak Park, Ill.

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Your firm’s proposed renovations of the HVAC, BAS, and lighting systems for the client’s 20 year-old 100,000-sq-ft building are awesome. Everything is smart and integrated, and the operators are drooling over the trending and reporting capabilities that will help them maintain high performance for the long term. Energy costs will be a lot lower, comfort and IAQ will be improved, and the asset value of the building will increase.

But the price tag is a bit more than the owner budgeted, even with the utility rebates, and the pinched-face CFO is telling you to make some cuts or he’s going to bring in a value-engineering team.

“Fine,” you think smugly to yourself. “Bring on the bean counters.” You’re ready this time because you’ve brought your own to the table and you’re ready to fight finances with finances. Looking at your firm’s characterization of the facility and the efficiency improvements from the design, your team of tax pros has estimated there’ll be enough federal tax deductions under the Energy Policy Act (EPACT) to win the day.

Under EPACT-2005 (and tax code 179D), tax deductions of up to $1.80/sq-ft are available for energy improvements. EPACT tax deductions are split into three buckets of $0.60 each for HVAC, lighting, and envelope measures. Envelopes qualify depending on the windows, roof insulation, and wall insulation, and along with the lighting have influence on whether the HVAC will pass in the modeling process required by the IRS. Even without envelope measures, the upgrades your firm is proposing are looking at $120,000 in tax deductions.

EPACT requires new systems to be at least 50% more efficient than the baseline of ASHRAE 90.1-2001, or each system can qualify that shows a reduction in energy costs of 16.66% versus the baseline. An independent third-party service provider (the tax pros’ firm) has to perform the modeling and a site visit to certify the improvements. If the owner gives your project the green light, the tax pro team will handle the EPACT requirements, and more.

Because buildings are depreciated over 39 years, any HVAC and lighting equipment removed for an energy improvement could result in business tax deductions called “abandonment.” The tax pros would take photos of the equipment before it is removed, determine and document its book value, and help process the applicable forms. And there are other finance strategies the tax pros can look into that accelerate depreciation and reduce insurance costs.

Suddenly that pinched-face CFO is smiling. He’s got a bunch of new friends, and you’ve got a big project.

- Ivanovich is the president of The Ivanovich Group, which provides research, analysis, and consulting services to the buildings industry. Ivanovich is former chief editor of Consulting-Specifying Engineer and HPAC Engineering.

Word on the Street

According to Debbie Danto, interim COO of Engineered Tax Services, Palm Beach, Fla., “Early involvement of a tax specialist is critical. If a proposed system is just 1% below the ASHRAE 90.1-2001 benchmark, all of the deduction is lost.” The extra investment in getting the system to meet the IRS requirement would qualify for the tax deduction, and lead to more energy savings. For more information about EPACT deductions, visit the American Institute of Architects (AIA) website at http://bit.ly/aDuVvi and the ETS  website at http://bit.ly/blYEx5.