Looking to make the business case for a green retrofit? Tax incentives promoting energy efficiency and alternative energy use can offer a powerful way to boost the return on investment. However, while such programs can be lucrative, they are also expansive, detailed, and complex. Companies that wish to participate in these programs will need to carefully research program details and requirements, as well as install appropriate processes to capture and document the information needed to support their benefit claims.

Federal Incentives
The largest federal incentive for energy efficiency, enacted as part of the Energy Policy Act of 2005 and extended through the Emergency Economic Stabilization Act of 2008, is U.S. Internal Revenue Code Section 179D (Public Law 109-58). Under Section 179D, a taxpayer may claim a deduction for all or part of an energy-efficient commercial building’s property cost. These deductions are broken down into two categories: the Permanent rule and the Interim Lighting rule. The Permanent rule focuses on improvements to three major areas of building construction: HVAC/hot water heating, interior lighting, and the building envelope. The Interim Lighting Rule provides taxpayers with methods for determining the partial deduction for building lighting systems.

To qualify for the full deduction of $1.80 per square foot, the taxpayer must reduce the building’s total annual energy and power costs with respect to its interior lighting systems, heating, cooling, ventilation, and hot water systems by 50 percent or more compared to the baseline standard established by ASHREA90.1-2001. Partial deductions of $.60 per square foot are available for individual building systems, including HVAC/hot water heating, interior lighting, and building envelop. Before any deduction can be claimed, the property must be independently certified for compliance with energy-savings plans and targets.

State Incentives
As part of the American Recovery Reinvestment Act of 2009 (ARRA), $3.2 billion was appropriated for the Energy Efficiency and Conservation Block Grant (EECBG) Program. The program provides federal grants to units of local government, states, and territories to reduce energy use and fossil fuel emissions and to improve energy efficiency. In addition, up to $456 million of this funding is planned to be made available under separate competitive solicitation for local energy efficacy projects, with details to be released at a later date.

On March 26, 2009, Vice President Joe Biden and Energy Secretary Steven Chu announced how the EECBG dollars would be spent. Clearly outlined in the announcement was the support for energy-efficient retrofits of residential and commercial buildings, as well as the creation of financial incentive programs for energy efficiency improvements.

In anticipation of receiving EECBG funds, many states have established or expanded tax programs to encourage energy-efficient development. Examples of such programs include:

• California – Los Angeles. The Los Angeles Department of Water and Power (LADWP) offers incentives for the installation of energy-saving measures, equipment, or systems (e.g., refrigerators/freezers, lighting, lighting control sensors, chillers, air conditioners, compressed air, roofs, and motors). Incentives are based on estimation software that determines the energy savings for each project. Prior to beginning a project, customers seeking to apply for these incentives should submit an application along with a CPP efficiency measure input form. The LADWP will then calculate the project’s energy savings based on the energy efficiency measures listed in the application. Upon successful project completion and a final post-completion inspection, the LADWP will process the incentive.

• California – Southern California Edison. Southern California Edison offers incentives for energy efficiency in lighting, refrigeration, food service, and air conditioning. Again, an application process is required. Applicants are eligible to receive up to 50 percent of the cost for each measure type. The maximum incentive is $2,400,000 per year per customer site.

• New York – The New York State Energy Research and Development Authority’s existing facilities program offers a broad array of different incentives that include both pre-qualified equipment rebates and performance-based incentives. The pre-qualified equipment rebate program offers rebates of up to $30,000 per project for equipment such as lighting, HVAC, chillers, motors, variable frequency drives, natural gas equipment, refrigeration, commercial kitchen equipment, and commercial washing equipment. Applications must be sent within 90 days of the invoice date for the purchase and installation of the equipment. Performance-based incentives, which are oriented toward large improvement projects, are available for electric efficiency, energy storage, natural gas efficiency, demand response, combined heat and power (CHP), and industrial process efficiencies. These are awarded as a one-time payment based on the expected first-year savings delivered by a given improvement.

Of special interest to developers, while some property tax incentives use their own definition of “green” practices, others are directly tied to Leadership in Energy and Environmental Design (LEED) certification. Over time, we believe more cities will adopt mandates requiring LEED certification. Some may also provide incentives for LEED certification; for example, Cincinnati offers a property tax rebate on LEED-certified buildings of up to $500,000 over 15 years for new buildings and 10 years for existing buildings.

Alternative Energy Tax ­Incentives
When considering the use of alternative energy sources, tax incentives should play a significant part in ROI analysis. Perhaps the most beneficial federal incentive related to alternative energy is the investment tax credit under U.S. Internal Revenue Code Section 48. This credit is designed to help offset the cost of installing and operating small-scale alternative energy sources – such as solar panels, small wind turbines, and fuel cells – that allow commercial buildings to generate their own sustainable energy supply (a practice known as “distributed generation”). The Section 48 credit offers taxpayers an income tax credit of between 10 and 30 percent of the total cost of expenditures for qualifying alternative energy property placed in service by December 31, 2016, including:

• Solar property,
• Fuel cells with capacity of at least ½ kw and generation efficiency greater than 30 percent,
• Small wind turbines with capacity less than 100 kw,
• Geothermal heat pumps,
• Microturbine property with capacity less than 2000 kw and generation efficiency greater than 25 percent,
• Combined heat and power systems with capacity less than 50 MW, mechanical energy capacity less than 67,000 hp, and efficiency greater than 60 percent.

The ARRA provides that there is no reduction in costs to which the Section 48 credit can apply attributable to grants, financing, or incentives received from states or local governments.

As is the case for energy efficiency incentives, a vast array of incentives for alternative energy use is also available at the state level. These include property tax exclusions, tax exemptions, and significant grant and loan programs.

Don’t Overlook Utility ­Incentives
Hundreds of utility incentive programs are available today in most states to support both alternative energy use and energy efficiency. Highlighted below are a few examples:

• California State Rebate Program for Wind and Fuel Cells. This program offers rebates of $1.50/W for wind and $2.50 - $4.50/W for fuel cells, depending on the fuel. The program is funded by each of the major utilities in the state; its 2008 funding was in excess of $80 ­million.

• California State Rebate Program for Solar Photovotaics. This program offers incentives ranging from $1.10 - $1.50/W, depending on the utility, for the current year. However, the incentive decreases annually depending on the length of time the utility has been involved in the program.

• Austin, Texas, Solar Photovoltacis Rebate Program. This program offers several incentives: a rebate of $3.75/W for residential and commercial customers, and one for equipment manufactured (60 percent minimum) in Austin – up to $5.60/W with a maximum of $100,000 or 80 percent of the invoiced cost per customer not to exceed 20kW. The program requires a pre-installation inspection to determine rebate eligibility. The final rebate is determined upon post- installation inspection.

• Texas - Oncor Electric Photovoltaic Incentive Program. This program offers an incentive of $2.46/W up to a maximum of $246,000. The program manager may perform both pre- and post-installation inspections. Projects are subject to performance verification up to five years after completion.

• New York - National Grid program. National Grid’s program for existing buildings provides technical assistance and incentives to upgrade the performance of existing equipment and systems. Incentives are designed to pay, on average, approximately 40 percent - 50 percent of the total project cost. Incentives for custom projects provide up to 45 percent of the total project costs.

The Importance of Up-Front Planning
As with all strategic initiatives, tax should be considered from the very beginning of a green retrofit project. It’s important to understand at the outset what incentives may be available for what types of energy efficiency and/or alternative energy investments, and what the requirements and restrictions are for each incentive. This can help project leaders decide which incentives may be worth pursuing and scope and plan the project to comply with incentive program requirements.

Advance planning is also important to establish the data collection procedures needed to obtain the energy usage, efficiency, and other information required by many incentives as part of the application and/or post-project review process. Property owners may often find it desirable to build these information-gathering processes, along with any necessary certification processes, into their subcontractor agreements, as this can dramatically reduce the property owner’s administrative burden.

Effective tax planning can drive significant cost savings on retrofit construction. With the stimulus package providing new funds for energy efficiency and alternative energy use incentives, companies today have more reason than ever to consider greening their properties – helping the environment, the economy, and their own bottom lines. SLDT

About the author: Jenny Bravo is a director with Deloitte Tax LLP and the tax leader for Deloitte’s Enterprise Sustainability group. She can be reached at 714-436-7554 or This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

This article does not constitute tax, legal, or other advice from Deloitte Tax LLP, which assumes no responsibility with respect to assessing or advising the reader as to tax, legal, or other consequences arising from the reader’s particular situation
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