FIXED ASSET ADVISORY SERVICES Green Energy Tax Services and Cost Segregation Services
Sec. 179D - Energy-Efficient Commercial Buildings Deduction Did the taxpayer design a building for a government entity? Y E S OR Did the taxpayer build a new facility or renovate an existing facility? Did the new facility or renovation include installation of interior lighting, HVAC or hot water systems, and building envelope that reduces power use 50% or more? (compared to reference building) Y E S Y E S Y E S NO Y E S Was the project certified? If 50% reduction is NOT met, is energy reduced by 20% for lighting, 20% for HVAC, or 10% for building envelope? Y E S NO NO NO NO No Section 179D benefit available N O Engineering Certification is Required Potential $1.80 per square foot deduction (whole building) YES Was the property placed in service before 2017? N O N O YES Potential $0.60 per square foot deduction (lighting, HVAC, or envelope) No Section 179D benefit available
EPAct 2005 Commonly called the Commercial Building Deduction or the 179D deduction. 2005 Congress enacted the EPAct 2005 program EPAct encourages building owners to increase energy efficiency in new and remodeled buildings by providing an immediate tax deduction for costs incurred Deductions are available for energy efficient lighting, HVAC, and building envelope (windows, roof, insulation, etc.). These costs would otherwise be generally depreciated over 15, 27.5, or 39 years. Any building that has been built or retrofitted between the dates of 1/1/2006 and 12/31/2016 with one or more of these systems may qualify for up to $1.80/ft 2 in federal tax deductions Note, this is a deduction, not a credit. It is reported as Other Deduction on tax return
EPAct 2005 Deduction can be taken by owner of private project Deduction can be taken by designer or design/build contractor of public project Applies to commercial property, not residential. Housing must be < 4 stories Property must be in the U.S.
How is it Computed? Maximum deduction is $1.80/ft 2 of building space, but limited by the actual cost of the equipment installed Must achieve a reduction in energy cost of at least 50 percent in total annual energy and power costs, as compared to a reference building that meets the minimum standards Standards are: ASHRAE 90.1-2001 if placed in service prior to Jan. 1, 2016 (Prior to 2016) ASHRAE 90.1-2007 if placed in service after Dec. 31, 2015 (in 2016)
How is it Computed? The energy savings are measured by reference to three main building system categories: o Interior lighting o Heating, cooling, ventilation, and hot water systems o Building envelope Additionally, a partial deduction is available from 30 up to 60 /ft 2 per system for buildings where the overall building does not meet the 50 percent energy savings threshold. In these instances, the individual systems for which the deduction is claimed must meet various reductions in energy usage.
How is it Computed? 179D Deduction Types Full Deduction - Exceed ASHRAE Standard by 50% - (most buildings built to code will qualify) Partial Deduction use 1, 2 or all 3 - Permanent Rule Modeling: One Option: Building Enclosure exceeds ASHRAE by 10% Lighting exceeds ASHRAE by 20% (parking garages) HVAC and Hot Water exceed ASHRAE by 20% Many possibilities for calculating the division of percentages - Interim Rule: Lighting Only A second option for lighting only projects Bi-Level Switching Required ASHRAE 90.1-200x Tables 9.3.1.1 and 9.3.1.2 for Lighting Power Density Straight Watts / ft 2 Calculation
How is it Computed? Full Deduction - Use Computer Simulation, not energy bills - Trane Trace 700, Energy Plus, Carrier HAP, VisualDOE, EnergyGauge, DOE2.1E & 2.1E-JJH, Owens Corning Commercial Energy Calculator, Green Building Studio, EnerSim - Other submissions are in process - Calculate reference building annual energy costs that meets ASHRAE 200x. - Calculate proposed building annual energy costs with all energy savings features. - Calculate ( reference proposed ) / reference. - If the calculation is at least 33% the $0.60 / ft 2 deduction can be taken, up to a maximum of $1.80 / ft 2 for a 50% reduction.
How is it Computed? Partial Deduction use 1, 2 or all 3 - Use Computer Simulation, not energy bills - Autodesk Green Building Studio, DesignBuilder, DOE-2.2, EnergyGauge, EnergyPlus, EnergyPro, EnerSim, equest, Hourly Analysis Program (HAP), IES <Virtual Environment>,Trace 700 - Calculate reference building annual energy costs that meets ASHRAE 200x. - Calculate proposed building annual energy costs with all energy savings features. - Calculate ( reference proposed ) / reference. - If the calculation is at least greater than 10% Enclosure or 20% HVAC or 20% Lighting the $0.60 / ft 2 deduction can be taken, up to a maximum of $1.80 / ft 2.
How is it Computed? Interim Rule: Lighting Only Bi-Level Switching Required Bi-level switching is defined as some combination of manual and/or automatic control that provides two levels of lighting power (not including off) in a space. A space is an area enclosed by four or more floor-to-ceiling walls. Occupancy sensors that turn all the lights off in a space do not qualify as bi-level switching. Occupancy sensors that dim or turn off only some lights in a space do satisfy the bi-level switching requirement. Hotel and motel guest rooms, storerooms, restrooms, and public lobbies are excepted from the Bi- Level switching requirement Meet IESNA minimum light levels Straight Watts / ft 2 Calculation % Improvement 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Tax Deduction $ / ft 2.30.32.34.36.38.40.42.44.46.48.50.52.54.56.58.60 Note: Warehouses must be reduced by 50%
How is it Computed? Can We Certify our own buildings/design? NO Before claiming the Commercial Buildings Tax Deduction, according to IRS Notice 2006-52, the taxpayer must have the project certified by an engineer or contractor who: o is properly licensed in the jurisdiction where the building is located o doesn't work for the taxpayer o has notified the taxpayer in writing that he or she has the requisite qualifications to certify the project In other words, you cannot legally certify your own work. The IRS requires a third party certification on approved software to obtain EPAct 2005 deductions.
Public Works! 179D Government Owned Buildings DOE goal to incentivize green design in government building sector Owner may allocate deduction to designer Owner may allocate the deduction to more than one designer Designer is defined as the person that creates the technical specifications for the installation of energy efficient commercial building property Designer can also include Design/Build and Engineering firms must be the lead or allocation can be shared/negotiated Certain States have special forms Allocation must be in writing and follow IRS Guidance (which isn t much)
Public Works! 179D Government Building Types Local Government Public Schools: Elementary, Middle, and High Schools Airport Authorities Parking Garages Police and Fire Stations State Government Colleges and Universities Prisons Federal Government Department of Defense Prisons
Public Works! (The Negative) Allocation must be signed by authorized owner representative - Who is that? Allocated to person primarily responsible for designing the property - Who can that be? - What if there is more than one designer? - What if a designer is unaware of the allocation? Public owner asks for part of, or all of, the proceeds of deduction allocation. - Schools in Florida, Nebraska, Texas Unfortunately Not illegal
Tax Implications Private - Deductions can be captured as far back as 1/1/2006. The deduction is qualified for the owner of building or lessee - if lessee pays for improvements by Filing Form 3115. Public - Deductions can be captured up to three tax years prior (amended return). The deduction is qualified for the designer of the system certified. Designer is described by the IRS to be the building architect, engineer, contractor, environmental consultant, or energy serves (ESCO) provider who creates the technical specification of a new building or retrofit to an existing building that incorporates energy efficient building systems. - An allocation letter must be signed by the building owner. This letter grants the designer the deduction from the public building owner. - Example: If the building in question is a public building, built with public funds (schools, municipal buildings, etc.) the tax deduction is available to the designer of the high efficiency system, such as an architect or engineer.
Tax Implications Designers should consider value of deduction prior to starting certification process 179D is a deduction, not a dollar-for-dollar credit Permanent tax benefit Reduction of basis for shareholders & partners (result in paying Long Term Capital Gain) Qualifying projects from prior years can be captured & claimed on amended tax returns IRS Revenue Procedure 2012-39 Change in Accounting Method (3115) no longer available for design firms of Gov. Build. Deduction must be claimed on original return or may file amended return (3 Years) Is there any Income left in the Company to offset the deduction?
COST SEGREGATION
FIXED ASSET ADVISORY (FA2) SERVICES A COMPREHENSIVE FIXED ASSETS STUDY APPROACH THAT HELPS COMPANIES EFFECTIVELY MANAGE AND RECOGNIZE THE OFTEN UNRECOGNIZED AND SIGNIFICANT TAX VALUE OF THEIR FIXED ASSETS COST SEGREGATION FA2 TANGIBLE PROPERTY REGULATIONS IMPLEMENTATION FIXED ASSET REVIEWS GREEN ENERGY TAX INCENTIVES TAX ACCOUNTING METHODS
FA2 COST SEGREGATION & GREEN ENERGY Cost Segregation - Accelerated Federal Tax Depreciation of Real Estate Assets Increased Cash Flow in Early Years Net Present Value Benefits may be Significant Maximizes Bonus Depreciation Identifies Repairs Expense Opportunities Identifies Assets that may be Disposed Green Energy Tax Incentives Tax Deductions, Credits and Rebates for Investments in Green Building Technologies Identifies Federal and State Green Energy Tax Incentives Cost Segregation and Green Energy Tax Opportunities Newly Constructed Facilities Existing Facilities Acquired in the Current Year Facilities Constructed or Acquired in Prior Years Automatic Change in Accounting Method Facilities that Incorporate Energy Efficient and Sustainable Technology Green Energy Tax Incentives Facilities that Have Been Improved - Identify Repair Expense Opportunities
What Does a Cost Segregation Study Do? Before After Real Property 100% Real Property 65% Personal Property 25% Land Improvements 10%
Cost Segregation Benefits Accelerated Depreciation Increased Cash Flow Business Growth
Depreciation Comparisons Using MACRS 35 Annual Depreciation Rate (%) 30 25 20 15 10 Property Classifications 5 Year 7 Year 15 Year 39 Year 5 0 5 10 15 20 25 30 35 40 Year
Why Have a Cost Segregation Analysis Done % % of Cost Basis Depreciated in First 3 Years eciated in First 3 Years 80 70 60 50 40 30 20 50 10 0 39 15 7 5 Property Life in Years (Assumes MACRS Half-Year Convention)
Cost Segregation Study When Does It Make Sense? New Construction Major Renovations At Time of Acquisition IRS Audit of Past Year(s) Real Estate Holdings (1988 to Present)
Correcting the Classification of Assets Placed In Service in Past Years Made Possible Issuance of Revenue Procedure 96-31 File Form 3115, Change in Accounting Method No Amended Returns
FA2 - COST SEGREGATION SERVICES Prior Year Projects and Acquisitions Qualify Re-classify prior year assets without amending tax returns (File Form 3115) Sec. 481(a) adjustment ( catch-up depreciation ) may be fully recognized in the year of change Can recover Bonus Depreciation for assets placed in service during bonus eligible years.
Example of Correcting Misclassified Assets Building (in Service January 2013) Identify $500,000 misclassified 5-year personal property Depreciation Claimed Correct Depreciation Depreciation Adjustment Results: $150,500 of Increased Cash Flow This Year (Assumes 35% tax rate)
Why Use An Engineer? Chief Counsel Guidance An accurate cost segregation study may not be based on non-contemporaneous records, reconstructed data, or taxpayer s estimates or assumptions that have no supporting records..the study should be performed by qualified individuals or firms, such as those employing personnel competent in design, construction, auditing, and estimating procedures relating to building construction.
Real Property
Land Improvements
Personal Property
FA2 - COST SEGREGATION SERVICES Opportunity by Type of Building Specialized Manufacturing Research Centers Heavy Manufacturing Light Manufacturing Hotels and Restaurants Auto Dealerships, Banks Apartments, Offices Shopping Centers Warehouses 0 10 20 30 40 50 60 70 80 90 100 Typical Short-Lived Property - % of Building Cost
Real Property
Land Improvements
Personal Property
Construction Cost Qualifying for Accelerated Depreciation Percentage of Construction Cost Qualifying as Short-Lived Property
Manufacturing Operations
Heavy Manufacturing Facility Cost $6.8 Million 1st Year Increased Cash Flow $231,000 NPV of Increased Cash Flow $750,500 Personal Property 76% Real Property 21% Land Improvements 3%
Restaurant New Construction With Bonus
Restaurant Cost $683,000 1st Year Increased Cash Flow $55,700 NPV of Increased Cash Flow $58,900 Real Property 55% Personal Property 45%
Retail Strip Mall Acquisition
6 Retail Malls Total Project Cost $25 Million 1st Year Increased Cash Flow $221,500 NPV of Increased Cash Flow $836,700 Real Property 80% Personal Property 8% Land Improvements 12%
Office Building Acquisition
Office Building Cost $47.9 Million 1st Year Increased Cash Flow $312,500 NPV of Increased Cash Flow $901,000 Real Property 90% Personal Property 10%
Auto Dealership New Construction
Auto Dealership Building Cost $4.6 Million 1st Year Increased Cash Flow $186,400 NPV of Increased Cash Flow $251,000 Real Property 67% Land Improvements 20% Personal Property 13%
NBA Arena Acquisition
NBA Arena Building Cost $63 Million 1st Year Increased Cash Flow $913,700 NPV of Increased Cash Flow $3,500,000 Real Property 59% Land Improvements 13% Personal Property 28%
Hotel New Construction
Hotel Facility Cost $15.3 Million 1st Year Increased Cash Flow $272,000 NPV of Increased Cash Flow $833,700 Personal Property 23% Land Improvements 9% Real Property Real Property 68% 68%
Golf Clubhouse New Construction
Golf Clubhouse New Construction Cost - $1.9 Million 1st Year Increased Cash Flow $ 33,000 NPV of Increased Cash Flow $127,000 Personal Property 35% Land Improvements 7% Real Property 58%
Apartment Complex Acquisition and Sec. 481
Property Management Company With 19 Apartment Communities Total Project Cost $55.5 Million 1st Year Increased Cash Flow NPV of Increased Cash Flow $ 6.6 M $ 4.4 M Real Property 74% Personal Property 12% Land Improvements 14%
Truck Distribution Facility Acquisition Sec. 481
24 Truck Terminals Total Project Cost $32.6 Million 1st Year Increased Cash Flow $ 935,000 NPV of Increased Cash Flow $1,000,000 Real Property 66% Personal Property 12% Land Improvements 22%
Ethanol Facility New Construction
Ethanol Facility 1st Year Increased Cash Flow NPV of Increased Cash Flow $2.75 M $8.08 M Personal Property 93% Real Property 4% Land Improvements 3%
Retirement Facility New Construction
Retirement Facility Cost $2.9 Million 1st Year Increased Cash Flow $210,000 NPV of Increased Cash Flow $211,000 Real Property 63% Personal Property 28% Land Improvements 9%
You need the complete picture! The cost segregation process provides only one piece of the puzzle.
The Rest of the Pieces. Sec. 179 Election Experience with IRS Audits Sec. 481(a) R & E Credits State/Local Implications Form 3115/Accounting Method Change Site Visits Sec. 1031 Exchange Supporting Tax Citations Embedded Building $ Fixed Asset Review/Corrections Sampling When Appropriate
COST SEGREGATION & GREEN ENERGY TAX SERVICES The Total Package Benefits of Recently Completed Studies of LEED Certified Projects Benefit Corporate HQ Full Service Hotel Increased Cash Flow Year 1 (39.6% rate) $ 1,180,000 $ 609,000 NPV of Increased Cash Flow (6%, 39-years) 911,000 574,000 Sec. 48 Business ITC (Solar / Geothermal) 495,000 - Sec. 179D Deduction 61,000 206,000
FIXED ASSET ADVISORY SERVICES (FA2) FA2 Leaders Servicing BDO USA, LLP Clients BDO FA2 Contact Expertise Contact Information Dan Fuller Doug Curtis FA2 National Director Green Energy Tax Incentives Cost Segregation Green Energy Tax Incentives (616) 802-3406 dfuller@bdo.com (616) 690-2009 DCurtis@bdo.com
BIOGRAPHY DANIEL FULLER, CPA Partner, Fixed Asset Advisory Services BDO USA, LLP dfuller@bdo.com Direct: (616) 802-3406 Mobile: (616) 450-6123 200 Ottawa Avenue, NW Suite 300 Grand Rapids, MI 49503 www.bdo.com Dan is a tax partner in the Grand Rapids office of BDO USA, LLP, with over 20 years of experience in federal and individual tax advisory services. He currently serves as the practice leader for BDO s Fixed Asset Advisory Group. Dan has worked extensively with both publicly-traded and privately-held companies and their owners providing tax compliance and consulting services. He has significant experience in fixed asset advisory services, green energy tax incentives, research and development (R&D) tax credit studies, ASC 740, and accounting methods. Dan has been a frequent contributor and quoted in many periodicals, including The Tax Journal, USA Today, Los Angeles Times, Detroit Free Press, Grand Rapids Free Press, The Grand Rapids Business Journal, Corp! magazine and Western Michigan Business Review.
BIOGRAPHY DOUG CURTIS Managing Director, Fixed Asset Advisory Services BDO USA, LLP dcurtis@bdo.com Mobile: (616) 690-2009 www.bdo.com Doug is an Electrical Engineer with 10 years of experience in electrical systems design and construction. Doug is also a licensed journeyman electrician. Doug has been with BDO USA, LLP for over thirteen years and has successfully completed over 750 federal cost segregation studies. Doug performs cost segregation studies on newly constructed, existing facilities (look back), and acquired facilities to increase cash flow through accelerated depreciation of construction costs and identification of all allowable tax credits. Additional experience includes work in various industries including retail, manufacturing, financial services, hotel and lodging, assisted living facilities, and medical facilities. Doug is also a member of BDO s Green Energy Tax team and has experience with Section 1603, 179D, 45L, and 48 Tax Credits. Doug has worked as an Electrical Engineer for a large consulting architectural and engineering firm. Responsibilities included design of electrical systems for commercial, industrial, wastewater plants, medical facilities, and residential facilities and construction observation on many types of projects.