179D Energy Efficient Commercial Buildings Deduction alliantgroup, LP National Consulting Firm Focused on supporting CPA firms nationwide

. alliantgroup – 17 offices: Houston (national office),, , Baton Rouge, , Los Angeles, Minneapolis, , Orange County, Phoenix, Pittsburgh, Sacramento, San Francisco, San Diego, Seattle, Toledo, Washington, DC

. alliantgroup – Has over 300 professionals nationwide . Former “Big Four Partners” and Managers . CPAs and Attorneys (Dedicated Tax Controversy Team – 18+ attorneys) . Engineers, Software Programmers, Chemists, Biologists, Architects, etc.

. alliantgroup – Only specializes in government sponsored incentive programs

. alliantgroup – Works with CPA firms and business owners . Back office to CPAs . Introduce specialized tax incentives Mark Everson Joins alliantgroup

. Served as Commissioner of Internal Revenue from 2003 until 2007

. Appointed Vice Chairman for alliantgroup

. Advises alliantgroup on strategic, operational, and client service initiatives

“Many companies do not take advantage of all the tax incentives to which they are entitled. alliantgroup can help. Based on my meetings with alliantgroup personnel and a number of the accounting professionals with whom they work across the country, it is clear the firm has achieved a great deal since its founding and is well positioned for further expansion.” –Mark Everson Dean Zerbe, J.D., LL.M. National Managing Director, alliantgroup –Washington D.C. . Former Senior Counsel and Tax Counsel, Senate Finance Committee: Involved with almost every major piece of tax legislation . alliantgroup’s ultimate tax policy expert . Focused on federal and state tax credits and incentives, and U.S. tax policy . Media “go-to” source for commentary on tax policy and other issues

Overview

. Background and Legislative History . Energy Efficient Commercial Building Property Defined . Special Rule for Public Property – Allows designers to take the deduction! . Different Ways to Qualify . Certification Process . Design Strategies . Case Studies . Q&A Legislative History

. Energy Policy Act of 2005 (EPAct) established 179D – Energy Efficient Commercial Buildings Deduction . Tax Relief and Health Care Act of 2006 . Notice 2006-52: Method of Computation/Qualification and Certification Process . Emergency Economic Stabilization Act of 2008 . Notice 2008-40: Special Rule for Government Buildings, Changes to partial qualification rules . Notice 2012-22: Further changes to partial qualification rules . Currently there are several bills and initiatives focused on streamlining, expanding, and restructuring the 179D deduction Energy Efficient Commercial Buildings Deduction . IRC Sec. 179D allows an immediate depreciation deduction of up to $1.80/sf for commercial buildings that achieve certain reductions in total energy and power costs with respect to…

. Interior Lighting . HVAC and Hot Water Systems . Building Envelope Polling Question #1

What is your experience with 179D?

. I have claimed a deduction. . I conducted an analysis, but determined that my project didn’t qualify. . I have never attempted a 179D deduction before. What Types of Buildings?

. Commercial Buildings include: . Typical commercial buildings – retail, office, industrial . Public or government-owned buildings . Federal, State, or Local Govt – offices, military bases, courthouses, post offices, prisons, universities, schools, libraries, airports, police, fire, etc. . Multifamily structure that is at least 4 stories or higher . LEED Certified Building . Located in the U.S. What Types of Construction?

. New construction AND renovations / retrofits of existing buildings can qualify . Property must be certified . Basis of property must be reduced by the deduction allowed . Property placed in service between 2006-2013 Who Gets the Benefit? . Whomever pays the cost for putting the energy efficient property into service . Owner or landlord . Tenant or lessee OR . Designers of government-owned buildings . This is the only green building incentive targeted towards designers Special Rule for Government-Owned Buildings . If the qualifying property is installed on public property, the government owner may allocate the deduction to the designer of the building . Designer may be an architect, engineer, contractor, environmental consultant, or energy services provider . Person who created the technical specs for qualifying property . Person who installs, repairs, or maintains the property is NOT a designer . If there are multiple designers, the government can allocate the deduction to the primary designer or among several designers at their discretion Polling Question #2

How many government-owned projects have you (or your clients) worked on in the last 4 years?

. 0-3 . 4-6 . 7-9 . 10 or more How Do You Qualify?

. Deduction amount is based on energy improvements over ASHRAE 90.1-2001 . Determine reduction of total energy and power costs with respect to lighting, HVAC, and building envelope as compared to a “reference building” . Deduction Amounts . Lesser of total cost of energy efficient property or: . $1.80/sf if the total annual energy and power costs related to lighting, HVAC, and hot water are reduced by 50% or more . $.60/sf for building envelope if there is a 10% reduction . $.60/sf for HVAC and hot water if there is a 15% reduction . $.30-.60/sf for interior lighting if there is a 16.67% reduction

Polling Question #3

Have you (or your clients) worked on government projects where energy efficient lighting was installed?

. Ye s . No What’s it Worth?

Max deduction if Max deduction if Max deduction if Max Square 1 System 2 Systems 3 systems Cash Benefit Qualifies Qualify Qualify Footage

100,000 $60,000 $120,000 $180,000 $63,000

200,000 $120,000 $240,000 $360,000 $126,000

300,000 $180,000 $360,000 $540,000 $189,000 Steps to Success

 Allocation Letter

 Get Certified through Energy Modeling

 Accounting Procedures

 Amend Returns Allocation Letter

 Obtain a signed allocation letter from the government owner  The designer  The owner of the building  The cost of the property  The date PIS  The amount of the deduction allocated to the designer  Penalties of perjury declaration  Building owner may seek a reduction in fees or other consideration in exchange for the letter Get Certified

 Obtain a certification with respect to the property  Must be performed by an unrelated third party engineer or contractor licensed in the jurisdiction in which the building is located  Energy Modeling must use a Performance Rating Method (PRM)  Must use DOE-approved software (about 20 different versions)  Analysis of design plans and specifications  Field Inspections of the building must be performed after the property has been PIS  Signed letter certifying that the building meets the required energy efficiency standards Traditional Energy Modeling Methods

Intent: Verify Compliance Goal: Proposed <= Budget . ASHRAE Energy Cost Budget Method Budget . Proposed Model = Actual . Budget Model = Min Std . Partial Measurements . Single systems . Varying combinations Proposed Performance Rating Method (PRM) Appendix G of ASHRAE Std 90.1-2004

Intent: Measure Performance Goal: Determine Percentage Exceeding Standard Exceeding Standard . Whole Building Analysis . Orientation • Actual Building • All Costs . All Costs (i.e. equipment) Proposed . Non-standard efficiencies . Used in LEED Certification . Partial analyses not • Based on Proposed contemplated • Method to set at Baseline minimum standard 179D Method = Modified “PRM”

Intent: Measure Partial Goal: Determine Percentage Performance Exceeding Standard Exceeding Standard . Full Building Deduction . Still “partial” Reference . Does not include whole “Comparable” to Actual building costs 2001 Compliant . Only systems that are a “part of a plan” to reduce costs . Need: Proposed Baseline . Partial character of traditional Only Systems Seeking Appendix G for Systems methods Deduction Seeking Deduction . Performance measure of Otherwise same as Otherwise same as Performance Rating Method Reference Reference Accounting Procedures and Tax Filings

 Final calculation of deduction  Reduce basis of the property  Prepare amended returns  Other deduction – no special form  If you’re the building owner you can claim the deduction on a current year return by filing Form 3115 for a change of accounting method and Sec. 481 “catch up” adjustment  Basis limitations 179D Analysis Required Capabilities

Identifying Allocation Reference Property Capability Inspection Certification Documentation Opportunities Letter Building Design Qualification Energy X XXXXX Modeling Engineering/ Contracting XXX Licensure Architecture XXXXX Design Mechanical Engineering XXXXX Design Electrical Engineering XXXXX Design Building and Energy Code XXXXX Analysis

Legal Analysis XXXX XX

Tax Planning X

Government XX X Relationships Things to Consider

 Proactive design is important – especially for full qualification  Examine the multiple paths to partial or fractional qualification  LEED certification doesn’t guarantee qualification but its a good indicator  Building has to be at least 50,000 square feet to make sense Case Study #1 Illinois- Based MEP Firm

. 8 projects - modeled HVAC and hot water systems . 3 Elementary schools ranged from 52K – 59K square feet . 2 Middle schools ranged from 120K-160K square feet . 1 Public Library with 56K square feet . 1 University building with 200K square feet . Tax Deduction $579,228 . Estimated Tax Savings – $202,729 . HVAC and hot water systems included Heat Exchangers, Hot Water Pumps, Chilled Water Pumps, Air to Air Heat Recovery Units, VFD’s, Radiant Ceiling Panels . average reduction in annual energy costs ranged from 21% - 65% Case Study #2 – NY State- based Architecture firm . 5 NY elementary schools – 185K, 173K, 130K, 110K, and 85K square feet . Tax Deduction – $1,229,400 . Estimated Tax Savings – $ 430,290 . All 5 schools were retrofit with HVAC and Interior lighting, 2 had extensive work to building envelope including white roof, insulation and coating . All 5 schools achieved in excess of 50% reduction in energy expense – earning the full $1.80 per sf deduction Case Study #3 – Engineering Firm Pacific Northwest

. 9 projects - modeled HVAC and hot water systems located in Washington State . 6 Elementary schools ranged from 61K – 94K square feet . 3 Military projects including a barracks . Tax Deduction – $661,397 . Estimated Tax Savings – $ 231,488 . HVAC and hot water systems included VAV, gas burners, and controls upgrades . average reduction in annual energy costs ranged from 23% - 46% Case Study #4 California – Based Architecture firm

 Department of General Services Buildings  Client brought 179D projects to alliantgroup after another provider disqualified properties.  4 buildings in CA – 475K, 468K, 350K, 55K square feet  Tax Deduction – $718,531  Estimated Tax Savings – $251,486  Lighting System qualified under interim lighting rule  LPD reduction of 30%, 63%, 57%, and 43% Get Green For Going Green

. CPAs – go through all of your architects, engineering firms, and design-build contractors . AEC Industry – consider ALL of your government projects . Govt offices, military bases, courthouses, post office, prisons, universities, schools, libraries, sports & recreation facilities, airports, police station, fire stations, parking garages, etc. . Move quickly – Don’t let the statute of limitations run! . alliantgroup Process . Secure the allocation of the deduction . Conduct the energy modeling and/or lighting analysis . Assess all 3 systems and all 8 deduction methods Questions & Answers

Valerie Ward National Director of Energy Credits and Incentives alliantgroup, LP

5400 Westheimer Court, Suite 700 · Houston, TX 77056 949-809-2170

[email protected] www.alliantgroup.com