There is a large opportunity for mechanical engineering firms to receive tax deductions on work they designed.
LEED VS EPACT
After you have heard the presentation, you may wonder why you haven’t been taking advantage of this lucrative program all along.
PRESENTER
First I’ll tell you a little about my background and then we’ll get started.
Just over three years ago, I was hired by an accounting firm to complete 179D studies because I met one requirement, which was the fact that I was licensed as a professional engineer.
I had no background in energy modeling and didn’t even have experience in building HVAC systems since my background is in Civil Engineering
Regardless, I was hired by the accounting firm to complete 179D studies because I met the IRS requirement of a Qualified Person which allowed me to sign off on 179D studies.
I was told to learn how to administer the program and I was given a commercial laundry building as a first project.
It was at this point that I learned that the program required a “Building Simulation” or an energy model.
My boss basically told me to do whatever it took to figure out how to qualify the building for the deduction.
At that point I started learning how to do energy modeling and I came across Bob’s website energy-models.com and starting learning how to use eQUEST.
After that first position, I worked for the 8th largest accounting firm in the US where I completed over 1,000 energy models and became licensed as a Professional Engineer in 49 states with California pending.
In late 2015, I founded Energy Consulting Engineering as a 179D tax deduction service provider that is based on an engineering approach to EPACT studies and also offers training.
HOW ENERGY MODELING AND ENGINEERING CAN MAKE YOU $
Why is knowing how to do Energy Modeling for 179D a valuable skill and career opportunity?
WHAT IS 179D?
So today we’re going to start by talking about what 179D is
We’ll talk about who can benefit from 179D
We’ll discuss the different qualifying percentages and the dollar savings amounts associated with the different percentage savings
We’ll talk about the history of the program and the recent Congressional updates since I know it’s something a lot of people are interested in hearing and want to know what the current baseline is
We’ll also discuss the documents that are needed to complete a study
And we’ll talk about some case studies
WHAT IS 179D?
179D is a Federal government program that was created as an economic stimulus to incentivize energy efficient real estate development and investing.
179D is often referred to as “EPACT” since it was part of the 2005 package of economic stimulus programs meant to energy efficient design of commercial buildings, which we all know use a large amount of fossil fuel resources.
The program is a good example of how government economic stimulus programs can result in a dual benefit of reduced energy demands and increased profits.
The program was created in 2005 as part of EPACT and it was recently extended through 2016.
My goal is to be able to act as consultant to answer any questions you may have on the program so that you can benefit from it as an engineering firm designing buildings as well as an energy modelers who can perform studies and benefit your clients.
To fully qualify for the $1.80/SF tax deduction, a building simulation or energy model of the building must show a 50% reduction in energy usage in dollars compared to the baseline
WHAT IS 179D?
The baseline building is created using ASHRAE 90.1-2001 for buildings put into service in 2015 or earlier. The baseline was recently to be ASHRAE 90.1-2007 for buildings put into service in 2016
The three different systems that are considered individually and contribute to the total energy usage are lighting, HVAC Systems, and Building Envelopes.
Now all of us in the energy engineering industry know that 50% more efficient than an ASHRAE HVAC baseline system like a VAV system is very difficult, it’s pretty hard since the baseline HVAC system is so efficient to begin with.
So we’ll talk about some strategies to either pursue full qualification of buildings or to partially qualify buildings for any of the 3 different systems for lighting, HVAC and/or building envelope.
WHO CAN BENEFIT FROM 179D?
This is one of the great things about this program because it’s very flexible on who can benefit from the tax deduction and includes a large portion of the commercial real estate development industry including building owners and renters as well engineers, architects and contractors.
The program is meant to encourage spending by developers to build new energy efficient buildings and update existing buildings with energy efficient improvements in order to stimulate the economy.
The 179D program is part of the 179 code which allows for a tax deduction of equipment for the owner and 179d allows for an additional tax deduction that offsets the costs of energy efficient capital improvements.
There is a dual benefit to energy efficient upgrades when the client is seeking to reduce their utility costs for heating, cooling and lighting of a building since they potentially could also receive a tax deduction to offset the cost of improvements
The program can also reduce the payback period of energy efficient upgrades which can help motivate clients to make the investment into the upgrades.
Another way the program can be used is to benefit the renters of a commercial building who are referred as the lessees of the building.
They may not own the building, but they lease the building and pay for improvements to update the building’s energy efficient components.
In this case, the lessees are paying the utility bills and they want lower bills as well as ways to offset the costs of the improvements.
For designers that specify energy efficient updates to public buildings, this is the part of the program that we really like and want to know more about!
This can benefit engineers, architects and contractors specifying energy efficient equipment for public buildings.
Since public buildings don’t pay real estate taxes, the IRS allows the benefit to be passed through to the designer.
This becomes a substantial benefit since it is an income tax deduction and therefore much more valuable than accelerated depreciation for commercial real estate owners.
At this point non-profits and tribal buildings aren’t included but it’s possible that it may be allowed in the future.
Another thing to remember is this is tax deduction not a tax credit. To determine the cash value of the deduction, the amount of the deduction must be reduced by the tax bracket the client is in.
Let’s say we have a client that has a 33% income tax bracket, (this is likely higher than a realistic income tax bracket but it works for the sake of understanding the cash value of the deduction).
For example, in a situation where a designer captures the full deduction of $1.80/SF on a 50,000 SF building, it would result in a $90,000 tax deduction.
With a 33% income tax bracket, the cash value is 33% of the deduction or 1/3 of $90,000 or a $30,000 tax deduction cash value.
This can be quite substantial when you’re looking at a 5-10% profit margin for the design of the energy efficient upgrades and you’re stacking the benefit of the deduction on top of your profit margin.
In addition to the program benefitting designers directly, being able to understand the program as a firm and educate clients on the program gives designers a competitive advantage in the marketplace.
WHICH DESIGNER GETS THE BENEFIT?
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WHAT KIND OF BUILDINGS ARE ELIGIBLE FOR 179D?
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WHAT IS THE ENERGY EFFICIENT TAX DEDUCTION BASED ON?