EPAct Tax Planning for the Top Ten U.S. Solar States
The U.S. is experiencing a phenomenal increase in commercial solar P.V. installations. In terms of commercial projects, the ten states with the highest growth rates are California, New Jersey , Massachusetts, Pennsylvania , Arizona, Texas , Colorado, North Carolina, Nevada, and Florida. In 2010, the U.S. market doubled in size. It is anticipated that the U.S. market will again double in size for the 2011 year. With that in mind, the U.S. will be one of the most promising solar P.V. growth markets in the world for the next two years. The largest building categories for solar P.V. installations are flat roof warehouse and industrial buildings.
Property tax advisers in the ten high growth solar states need to help their clients utilize EPAct in preparation for solar installations.
Before installing solar P.V. most buildings need to get their buildings in energy fiscal and physical shape, and landlords with large flat roof warehouse and industrial buildings in particular can use Energy Policy Act (EPAct) tax incentives to do it. Landlords that do not make their buildings energy efficient with solar P.V. generation will increasingly find themselves at a competitive disadvantage in these ten markets.
The EPAct Tax Opportunities
Pursuant to Energy Policy Act (EPAct) Section 179D, property owners making qualifying energy-reducing investments in their new or existing locations can obtain immediate tax deductions of up to $1.80 per square foot.
If the building project doesn't qualify for the maximum EPAct $1.80 per square foot immediate tax deduction, there are tax deductions of up to $0.60 per square foot for each of the three major building subsystems: lighting, HVAC (heating, ventilating, and air conditioning), and the building envelope. The building envelope is every item on the building's exterior perimeter that touches the outside world including roof, walls, insulation, doors, windows and foundation.
Alternative Energy Tax Credits and Grants
Pursuant to Internal Revenue Code Section 48, companies or individuals installing solar P.V. can take up to a 30% tax credit of the total investment amount. In addition, sections 1104 and 1603 of the American Recovery & Reinvestment Act of 2009 allow for the taxpayer to take the tax credit as a cash grant so long as their project meets the qualification requirements. Cash grants are available for projects that “began construction” during the period starting January 1, 2009 through December 31, 2011.
Unique 2011 Opportunity: Enhanced Bonus Tax Depreciation
The credits described above are ordinarily eligible for a 5 year MACRS depreciation, but building owners who install these renewable energy systems after September 8, 2010 through December 31, 2011 can take 100% depreciation tax bonus immediately. Even if building owners miss this 2011 window, they can enjoy a 50% tax depreciation bonus on alternative energy equipment placed in service from January 1, 2011 through December 31, 2012.
Solar P.V. rooftop systems are used to generate electricity in many building types. Warehouses and industrial buildings are typically the best candidates, but any building with a large, unobstructed flat roof is a potential target for solar P.V. installation. Large roofs enable large P.V. systems that generate more electricity. Often, tax equity partners or utilities will be willing to make the investment for a rooftop warehouse solar installation and enter into a power purchase agreement where the warehouse operator, post-installation, will purchase its electricity at an agreed price for a fixed period of time, usually 15 to 20 years . In order to maximize the energy and tax savings from solar P.V. installation the owner needs to get the building into both physical and fiscal shape.
P.V. Building Fiscal Shape
A building owner should also make energy efficient improvements before solar P.V. installation in order to get the building into “fiscal shape.” In order to get the maximum $1.80 per square foot EPAct tax deduction, a building owner should consider a lighting retrofit before installing solar P.V . Many industrial and warehouse buildings currently have inefficient metal halide and T-12 incandescent lighting, whose production and importation is officially banned by the Federal government. This means that warehouses that still have this lighting technology will soon be subject to large price increases for replacement lamps and bulbs. Therefore, an astute building owner considering solar P.V. will perform a lighting retrofit to highly efficient fluorescent, induction or LED lighting in order to take advantage of the EPAct tax deduction and minimize future costs.
P.V. Building Physical Shape
In order to maximize the economic benefits of solar P.V. installation, the building owner must get the building into “physical shape.” When installing solar P.V. it is most important to maximize the useful roof space, meaning that as much of the flat areas of the rooftop should be uncovered as possible. In order to do this, the building owner should consider an energy efficient HVAC upgrade because most buildings have their HVAC systems on the building roof. However, the newer and more efficient HVAC systems can be installed on the exterior or interior walls of the building as well as the roof, which results in maximizing the useful roof space and potential large immediate HVAC tax deductions. Before solar P.V. installation the building owner should replace roofs at or near the end of their useful life cycle and improve insulation levels. The new roof and added insulation will enable the owner to install a less expensive energy efficient heating system while substantially reducing heating cost.
The following chart illustrates the potential annual energy cost savings for a warehouse that installs solar P.V., which consists of the amount saved from lower energy lighting costs and potential net metering payments received.
1. Energy cost savings = kW saved (watts x .001) x 10hrs/day x 6day/wk x 50wk/yr x $.10/kWh.
2. Solar P.V. system assumptions: half of roof covered, 15 watts/sq ft panels.
3. Net metering is the payment that utilities are forced to make to the owner of a solar P.V. system for the extra electricity that is produced by the system.
The solar project electrical energy cost savings from the lighting projects presented above can be combined with the lighting tax cost savings to produce the total savings presented below:
1.EPAct tax savings based on 40% combined Federal and state tax rate, and $1.80 per sq ft tax deduction.
Tax advisers in the top ten solar P.V. states should help their clients use EPAct to get their buildings in fiscal and physical shape for solar. Furthermore, tax advisers for landlords in these markets should understand that their clients may be at a competitive disadvantage if they don't perceive the trends in this area which enable tenants to obtain materially lower energy related operating costs. The time to act is now, since many warehouse and industrial property owners are moving quickly to commence Solar P.V. projects before the 1603 cash grant expires on December 31st , 2011.
Charles R. Goulding Attorney/CPA is the President of Energy Tax Savers Inc., The EPAct 179D Experts, an interdisciplinary tax and engineering firm that specializes in the energy-efficient aspects of buildings.
Charles G. Goulding is an analyst with Energy Tax Savers, Inc., The EPAct 179D Experts.
See Charles Goulding, Jacob Goldman and Joseph Most, Complete Warehouse Tax Enhanced Energy Efficient Design, to be published by Corp. Bus. Tax’n Monthly.
See Charles Goulding, Jacob Goldman and Taylor Goulding, Tax Planning for the 21st Solar Century, Corp. Bus. Tax’n Monthly, Feb. 2009, at 23.