Capturing Tax Incentives from Energy Retrofits

firstenergymonopolyAs we approach the month of April, we draw closer to the deadline to file our taxes. Though we all experience a bit of dread at this prospect, tax season doesn’t always have to carry a negative connotation. Unknown too many of the clients I work with, are a number of tax exemptions or incentives for the energy related retrofits that they perform. In many cases, the value these deductions present can be as lucrative to the project as the energy savings themselves.

Below is a very high level (and overly simplified) overview of three tax mechanisms available in the market today. There are certainly more to consider (qualified leasehold improvements and bonus depreciation), but these represent the most reoccurring opportunities I have found for my clients. Some have strict deadlines regarding when you can claim the deduction while others require detailed engineering studies. It is important to be aware these opportunities exist, but ultimately, you will want to work closely with your tax professional to capitalize on the full value.

EPAct 179D

This is probably the most commonly used tax tool we can offer to our clients. This federal legislation was passed in 2005 to provide a tax related incentive for businesses to curtail energy consumption. It offers up to a $1.80 per square foot tax deduction for improvements made to buildings. The deduction is available in three equal parts related to HVAC, Building Envelope, and Lighting. Each is eligible for a deduction of $0.60 per square foot.

Case Study: Recently, I worked with a manufacturing client on an LED retrofit for their facility. The building is approximately 40,000 square feet. This project was eligible for the $0.60 per square foot deduction through 179D. Their write-off on their tax returns is $24,000. To determine the actual monetary impact, we simply multiplied their deduction by their effective tax rate. A top end tax rate of 39.6% yields a value of $9,504 of avoided tax payments.

Removal and Partial Disposition

This tax deduction allows you to write down the remaining depreciable cost basis of what gets thrown in the dumpster during a renovation or improvement of a building. Everything with a deprecation schedule can be included. It is a one-time tax benefit for building owners that can also incorporate the labor on the project. Each building and retrofit project is unique, so deduction values will vary. It is not uncommon to capture 15% to 25% of the total renovation value.

Cost Segregation

This is an approved IRS mechanism to accelerate depreciation of certain assets. Typically, most owners will utilize a straight line deprecation schedule of 39 years for their whole building. Cost segregation breaks our various components of the building and accelerates their depreciation schedule. Some key elements of cost segregation include the following.

  • Depending on the component, depreciation schedules can be reduced to 5, 7, or 15 years
  • This can apply to anyone who spent $250K or more on a building or $200K on leasehold improvements
  • The building should have been acquired or renovated in the last 15 years
  • Benefits will vary, but a general rule of thumb is $50,000 Income Tax Deduction per $1 million of building cost basis.  Benefits will range based on building type

 

Taxes always appear complicated and challenging to understand. Do not allow that to be a deterrent. There are too many great opportunities in the market to capture additional value for the work you are already performing. In addition, in many cases, I have found the deductions my clients can claim often make projects more tenable because of the reduced payback period. If you do not already work with a tax professional that can help you understand your options, feel free to contact me directly (eauerbach@energyplanners.com) and I can help pair you with a reputable professional in your community.

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Return to the 1990’s- FirstEnergy Monopoly is Wrong for Ohio

firstenergymonopolyOhio utilities are appealing to the Public Utility Commission of Ohio (PUCO) for a multi-billion dollar bailout in order to continue operating costly power plants at a profit. After a nearly seven year push by Ohio electricity utilities to secure profit guarantees for their power plants, a decision is close to reality. The deal will effectively create a monopoly for FirstEnergy and AEP to purchase electricity from their unregulated subsidiary power plants, at above market rates, and re-sell that power to consumers at a guaranteed profit.  FirstEnergy and AEP argue the deal is necessary to maintain grid reliability, additionally stating that these plants may otherwise close if this agreement does not occur. Both utilities further cite their inability to compete with newer gas-fired plants.

Who makes the decision?

According to a recent article in the Columbus Dispatch, FirstEnergy is working to finalize a revised 8-year agreement with PUCO staff. Earlier in September, PUCO staff rejected the original FirstEnergy proposal for a 15-year deal. Regardless of staff recommendations, the PUCO 5-member board has the authority to accept or reject any proposal.

What happens next?

FirstEnergy and AEP have concluded their trial-like hearings, following testimonies from several dozen parties over the last month. Currently, formal discussions are now in place to hash out the details and logistics of a revised agreement. Once completed, the PUCO will review the case and rule, which will likely occur sometime in early 2016. However, if there is a settlement, the process could conceivably be prolonged, and there will be another round of hearings to re-examine the benefits of the deal.

Why we agree with opponents

EPCO firmly believes this agreement will lead to higher commodity prices for consumers and ultimately prove harmful to the business community at-large. FirstEnergy invested heavily in coal at a time where natural gas prices plummeted. FirstEnergy is now looking to the consumer to bail them out of a bad bet. FirstEnergy should solely be held accountable for investment decisions that have failed to pay off.

Opposition to this newly proposed agreement has been swift and fierce. Opponents of the deal argue that a bailout of this nature only serves to benefit the utility companies’ at the expense of consumers. The claims made by the utilities of projected future consumer savings have been deemed as patently false.

In the 1990’s,  FirstEnergy worked to deregulate the energy market and were a key component in making that happen in 1999. During the next 8 years, FirstEnergy talked about how it “improved the productivity of its generating fleet by 27% and added about 1,600 megawatts of capacity, at no risk to the customer.”

When Ohio manufacturers wanted to re-regulate utilities in hopes of getting lower energy rates, FirstEnergy argued that, “flip-flopping between regulation and competitive markets whenever one offers a lower price than the other undermines the ability of utilities to make the investment decisions needed to maintain reliable and adequate service. And, if the basic rules of our industry are rewritten every eight years of so – irrespective of the long-term impact of doing so – major providers of capital won’t risk investing the billions of dollars it will take to meet Ohio’s energy needs in the years ahead”.

We do not want to return to monopolies

Now, FirstEnergy is working to re-regulate utilities, with the intent of becoming a subsidized and protected monopoly once again. FirstEnergy is struggling to compete in the regional electricity market. If the bailout doesn’t occur, FirstEnergy has spoken out saying it would support Ohio legislators overturning the deregulation legislation FirstEnergy once fought for in the 1990’s, which would in turn, make the company a monopoly protected from competition.

At EPCO, we believe that consumers, both large and small, should have the right to shop for a low competitive price on their electric generation. This proposed bailout amounts to nothing more than monopolies for FirstEnergy and AEP in their respective territories. The end result will be an increased cost of doing business that ultimately will adversely affect from business growth and development in Ohio.

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