The wide array of tax and financial incentives for eco-minded construction and improvements have developers, architects and designers seeing green.
Federal, state and local governments have created and extended over 2,000 financial incentive programs to reward energy efficiency and the use of alternative energy in the design, construction, and improvement of buildings and homes. To redeem many of these beneficial incentives, a qualified third party expert is needed. This relationship with a third party expert will not only provide the required certifications by these agencies, but early involvement also allows for design alternatives to be assessed so that all green building incentives are maximized. Companies that have developed properties in the past five years without necessarily trying to “go green” are often pleasantly surprised to discover that they qualify for tax credits and deductions among other financial incentives, thanks in part to new construction trends, rapidly changing technologies, and more stringent building codes.
Green incentives generally target both commercial and residential developers (such as apartments, condominium communities, and production homebuilders) or those making improvements or renovations to any building. However, there are also significant incentives in place for architects and designers of government-owned properties that should not be overlooked.
Companies can reap the rewards if they are familiar with all the available incentives for their jurisdictions. Depending on your location, potential benefits may include: State Tax Incentives, Rebates, Property Tax Exemption, Grants, Sales Tax Exemption, and Federal Tax incentives. Many of these incentives are limited to a first-come, first-served basis or require application before construction begins. Thus, it is critical to work with an expert in this area to ensure that dollars are not being left on the table. Moreover, any company constructing a green building should get an incentive specialist involved as soon as possible so they can make design recommendations that will ensure the building qualifies for as many incentives as possible.
State Tax Credits and Incentives
Some of the most often overlooked, yet most lucrative tax incentives, can be found at the state level. State incentives frequently accommodate companies building to the needs of their particular environment. There are also a range of more standard ways to obtain state tax credits, deductions, and exemptions. Certain states award incentives to developers purchasing and installing qualifying equipment used to optimize energy efficiency, such as solar panels or geothermal heat pumps. Other states award companies simply for building an energy efficient building or by having the facility meet a certain threshold of energy use.
Rebates are a great way to benefit from going green on a local level. For businesses that meet certain energy efficiency criteria, such as those established by the federal Energy Star program, the owner or tenant may be awarded a discount on the monthly electric bill. Companies can also receive rebates for specific items they purchase in their buildings, such as energy efficient light fixtures or heating equipment. The dollar amounts of these rebates can vary, and are usually based upon the aggressiveness of a particular company's campaign to go green.
Property Tax and Sales Tax Incentives
Some of the more appealing property and sales tax incentives include exemptions, exclusions, abatements, and credits. Many areas allow for significant property tax exemptions if the building is certified as “green”. For example, the State of Nevada provides buildings that earn certification under the United States Green Building Council’s Leadership in Energy and Environmental Design (LEED) with property tax abatements that can range from 25% to 35%. In fact, there are other property tax benefits that allow the added value of renewable energy systems to be separated from property valuation for tax purposes. For example, the cost of a solar panel system may sometimes be excluded in the property tax assessment. In some cases, property tax exemptions can be applied to the incremental cost of building “green”.
Companies making purchases in an effort to be more energy efficient, such as purchasing a new appliance or renewable energy system, can qualify for a sales tax exemption or refund, or a partial abatement. A number of states also offer sales tax holidays, where investments in energy efficiency are exempt from state sales tax for a period of time.
State grants are a great way to get in on the financial incentives for going green. States create lucrative grant programs to ease the burden for those getting started or actively trying to pursue going green. For example, the Tennessee Clean Energy Technology Grant Program rewards businesses 40% of the total cost (up to $75,000) of installing clean energy technology, such as solar energy systems, wind energy systems, or hydrogen fuel cells. Several states offer grants that are designed to aid companies in exploring the viability of implementing an energy efficiency project or process improvement. Grants are typically available to both the public and private sector, research universities and businesses alike, with grant types ranging from research to large-scale implementation.
Federal Deductions, Credits and Grants
While there are thousands of different tax incentives offered across the country by varying state and local municipalities, arguably the most widely utilized tax deductions and credits are offered by the federal government. Most of these incentives require a third party certification to comply with IRS regulations.
Section 179D - Commercial Developers, Real Estate Investors, and Architects
The Emergency Economic Stabilization Act of 2008 extended the Energy Efficient Commercial Buildings Deduction through December 31, 2013. This legislation offers a tax deduction of up to $5/sf to those investing in energy efficient improvements placed in service after August 8, 2005. Eligible improvements must reduce energy use for any of the following categories: a building's envelope, HVAC, and/or interior lighting systems. Unlike most deductions, which are based on the amount spent, this deduction is primarily based on affected square footages. Ideal candidates will generally have improvements with a square footage of at least 50,000 square feet. A wide range of improvements, from simple lighting retrofits to full-scale construction projects, qualify for this timely tax break. Other great candidates include regional or national chains with multiple locations. Architects are eligible to receive this $5/sf for any government building they design, even though they have no basis in the property.
Section 45L - Apartment, Condominium, and Single-Family Residence Developers
Another tax incentive extended by the Emergency Economic Stabilization Act of 2008 was the Energy Efficient Home Credit, offering a tax credit of $2,000 per dwelling unit to developers of energy efficient buildings completed after August 8, 2005. A dwelling unit should provide a level of heating and cooling energy consumption that is significantly less than certain 2004 energy standards. Given that current energy codes have evolved tremendously over the past five years, many developers are already building to specifications that would meet the criteria for this credit. There is still an opportunity to retroactively claim any missed tax credits, as long as the return is amended before the three year federal statute of limitations. All apartment buildings, residential condominiums, and production home developments completed on or after August 8, 2005 are worth assessing for potential energy tax credits. Eligible construction also includes substantial reconstruction and rehabilitation.
Section 48 – Energy Tax Credit and Grants
The Section 48 Energy Tax Credit provides a 30% tax credit to those who actively invest in solar energy. Those purchasing qualifying stationary microturbine power plants, certain geothermal equipment and heat pumps, and certain combined heat and power or cogeneration systems are awarded a 10% credit (applicable to property placed in service after December 31, 2005 and before January 1, 2017). For companies that don’t need tax credits, there are currently incentives in place that allow you to receive a Federal grant in lieu of tax credits. Section 48 property has a tax recovery period of five years, allowing for a potential 50% bonus depreciation deduction if placed in service in an eligible year . Businesses that find the Section 48 tax credit to be beneficial are often able to use a cost segregation study to increase the allocation towards property eligible for these credits while accelerating depreciation on other assets.
The move toward environmentally friendly building design and construction is rapidly gaining momentum. Many companies are surprised to learn that they qualify for these incentives by simply using the current building standards. Arming yourself with in-depth knowledge of the available incentives, while developing relationships with third-parties experts who can provide the necessary analysis and certifications will provide you with a tremendous tax and financial advantage.
KBKG has the in-house expertise and the required professional qualifications to certify and secure these lucrative tax and financial benefits. Our team can also assist in the design process of future projects by suggesting design alternatives that would ensure qualification for specific green building incentives. Call 1.877.525.4462 x150 for more information.
Author: Gian Pazzia, CCSP & Scott Zarret