By Matthew Rader, Director of EPAct §179D and Cost Segregation, SourceCorp Professional Services

With energy efficiency in the forefront of the building landscape, functioning “off-grid” is the ultimate realization of efficiency.  The only way to achieve that is to have on-site renewable energy in one form or another.  There are all kinds of pros and cons with different systems of renewables.  One benefit they all share is tax incentives in the form of credits and deductions, and in some cases both.

On the credit subject, the energy credit was originally enacted as part of the investment tax credit in the late 1970s. Under its original formulation, certain types of energy property qualified for the investment tax credit even though they are “structural components” of a building.  It has been extended over the years to include new dates and new types of property.  Currently, the list of qualifying property includes solar, fuel cells, small wind turbines, geothermal systems, microturbines, and combined heat and power (also called cogen or CHP).  The credit is 30% of the total cost of the system for solar, fuel cells and small wind turbines and is 10% for the geothermal, microturbines, and cogen.

For renewables that are incorporated into building systems, most notably the HVAC system with geothermal, certain types of microturbines, and cogen, there is a potential deduction as well.  Under §179D if a building is 50% more efficient over the baseline of ASHRAE 90.1-2001 with respect to lighting, HVAC/hot water, and envelope, there is $1.80 per square foot deduction.  Solar, fuel cells and small wind are excluded from §179D because they are somewhat separate from the building systems, and if you take them away you are left with the efficiencies, if any, of the building. 

With geothermal, microturbine and cogen, you get the added tax benefit of accelerated depreciation.  The IRS says that a building must have general HVAC, and as a result the HVAC is depreciated over a 39-year period.  Because these systems are considered qualified energy property they have a 5-year recovery period so you recoup the investment more quickly and depending when the system is placed in service, bonus depreciation could apply as well.

As an example, let’s say you install a geothermal heat pump that costs $500,000 for a 100,000 square foot building.  The benefit would be as follows with a 35% tax rate and if installed in a year where bonus depreciation was allowed:

First Year Cash Flow                                                                                                                       $138,150                             

                §179D Deduction (100,000 sq ft x $.60 per ft x 35%)          $21,000

                10% Credit ($440,000¹ x 10%)                                                      $44,000

Bonus Depreciation ($418,000² x 50% x 35%)                       $73,150

¹ Basis in geothermal heat pump property reduced by §179D deduction

² Basis in geothermal heat pump property reduced by §179D deduction and 50% of energy credit

The example just shows if no other renewable is installed and if only $.60 in benefit is received from §179D.  The tax savings could easily add up to $1 million with combined systems and the full $1.80 on the §179D.  Also, when factoring the accelerated depreciation deductions over the first 5 years, paying down debt service or reinvesting into your company, the return would be even better.

While it doesn’t make sense to install any of these systems just to receive the credit and deductions, it certainly makes projects more affordable and more sustainable, and it lowers operating and life-cycle costs for projects to offset any increases in construction costs.

Founded in 1983, SourceCorp specializes in EPAct §179D tax deductions, cost segregation studies, LIFO accounting solutions and R&D tax credit studies. http://www.sourcecorp.com

For more information on EPAct §179D tax deductions, visit our virtual booth. http://bit.ly/hqKM2F