The Energy Tax Aspects of Washington, D.C. Area Buildings
The Energy Policy Act (EPAct), in section 179D, provides substantial tax incentives for designers of qualifying energy efficiency projects in government buildings. Washington D.C. is a particularly strong area for the EPAct designer benefit because it is structured around a huge Federal government sector, housing each branch of the Federal government, including virtually all government agencies. With an expanded Federal government, the Washington area, including new facility construction and existing building renovations, has the potential to be the leading area in the country with regard to EPAct designer benefits. Since new Federal buildings are required to be LEED certified and existing Federal buildings have mandatory energy reduction targets, Washington D.C. presents substantial EPAct tax deduction opportunities for the building design community.
EPAct 179D Tax Deductions
Pursuant to EPAct Section 179D, building owners or tenants making qualifying energy-reducing investments can obtain immediate tax deductions of up to $1.80 per square foot.
If the building project doesn't qualify for the maximum $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.
EPAct 179D Designer Benefits
As part of section 179D, the designers, including architects and engineers, of government owned building new construction or renovation projects, can claim the EPAct tax deduction. The intent with the Section 179D designer benefit is that the government property owner is supposed to receive the larger economic benefit, which is the permanent perpetual energy savings, and the private designer receives the onetime tax incentive for achieving the prescribed energy efficiency targets. The hope is that with the tax incentives in place for government building designers, the entire sector will become experts when it comes to energy efficient building equipment and use their expertise in private building projects as well.
The Washington D.C. Design Community
The Washington D.C. has a numerous government buildings including some very large ones. The following chart illustrates the potential EPAct tax deductions for some of the most well known and largest government buildings in Washington D.C.:
The Washington D.C. area employs a tremendous number of design professionals including architects, engineers, lighting designers and design and build contractors that support the government sector. In fact, many large national architecture and engineering firms have their national office and/or largest office in the Washington D.C. area. All of these government building design firms have the opportunity to earn large EPAct tax deductions if their designs meet the Section 179(D) targets.
The Department of Energy’s Forrestal Building has undergone as large of an energy efficiency transformation as any Federal building in Washington D.C. In 2007, the Forrestal Building became only the second Federal building in the country to be awarded the energy star label. Some of the energy efficient improvements made to the building in recent years include installing solar P.V. on a large portion of the building’s roof, upgrading to highly efficient fluorescent and LED lighting, and installing automated HVAC control systems . As can be seen in the above chart, the EPAct tax deductions for the Forrestal Building design teams could be quite substantial.
LEED Certification Explained
LEED, which stands for Leadership in Energy and Environmental Design, is the fast growing marquee standard for sustainable buildings established by the U.S. Green Building Council (USGBC) . Since the USGBC's introduction of LEED in 2000, the rating system has become the national standard for green building certification; with more than 25,000 registered LEED buildings in the country . There are four LEED certification levels, with LEED platinum being the highest recognition. Energy efficiency accounts for a substantial percentage of the points required for LEED certification; therefore, it is probable that a LEED building will qualify for some level of EPAct tax deduction.
New Construction/Major Renovation LEED Mandates
Various Federal government departments currently require all new and substantially improved government buildings to meet LEED certification requirements. In addition, starting in 2012 all Washington D.C. commercial buildings 50,000 square feet or greater will have to meet or exceed LEED New construction 2.2 or LEED core and shell 2.0 standards. Post secondary educational facilities also have to meet these same standards.
In order to receive HVAC and building envelope EPAct deductions the building must be modeled using IRS approved modeling software . The tax advantage for LEED certified buildings is the fact that they are already modeled. Experienced tax experts with engineering backgrounds know how to convert an existing LEED model into a tax model.
Existing Federal Building Energy Reduction Targets
Section 431 of the Energy Independence and Security Act of 2007 set out a 10 year Federal building energy reduction plan. The energy reduction goal for new and major renovation projects is approximately 3% each year until 2015, with the ending target being an overall 30% energy use reduction.
LEED Knowledge Transfer-Developing Modeling Expertise
The Federal government LEED and energy reduction mandates are creating a large cadre of design professionals that are both experienced LEED professionals and building energy management experts. For example, Gensler a leading national architecture firm has over 400 LEED professionals in its Washington D.C. office. The large and expanding cadre of LEED experienced engineers is resulting in huge increase in the number of design professionals who are familiar with building energy simulation modeling. This expanded modeling expertise is the key to securing the larger HVAC and building envelope section 179(D) tax deductions where modeling in IRS approved software is required. The focus on existing building energy reduction is expanding the number of design professionals who know how to make a building substantially more energy efficient, which is also important knowledge to transfer to the new building design process.
Many Washington D.C. buildings have large adjoining parking garages that can save substantial energy costs and generate large tax deductions by upgrading to energy efficient fixtures. In Notice 2008-40 issued March 7th, 2008, the IRS announced that parking garages are a property class that is specifically entitled to use the EPAct tax deductions. Also, parking garages are excluded from the tax bi-level switching requirement . Typical energy efficient lighting technologies that meet the EPAct requirements include fluorescents, induction and LED lighting.
For building interiors, the first major building category to move to LED's was parking garages. Electricity costs for lighting is essentially the exclusive energy cost for garages which often have high electricity costs due to 24 hour operation often required for security purposes. Now we are seeing the LED market quickly expand and the LED lighting industry is in position for broad expansion into the office building market .
As indicated in a recent LED magazine article, “Dramatic improvements in commercially available LED performance in recent years, as well as significant cost reduction, has made it feasible to design LED lamps to offer comparable lumen output and to compete with other established lighting technologies on the basis of cost of ownership .” The L.E.D. Industry has many major nationwide initiatives to accelerate L.E.D. installations and to spread the word about this most efficient lighting technology on the market.
Washington D.C. Energy Benchmarking Law
Washington D.C. is one of the five major U.S. jurisdictions to have recently enacted an energy benchmarking and disclosure law . Starting in 2009, all district owned buildings over 10,000 square feet are now required to benchmark energy using the EPA’s portfolio manager. Also, starting in 2011 for buildings built before 2009, and for those built after 2009 two years after building completion, all district owned buildings are required to publicly disclose all energy benchmarking information. The D.C. benchmarking law also started to apply to privately owned buildings in 2010 and by 2013 all privately owned buildings over 50,000 square feet will have to benchmark energy use and disclose the information.
When looking to lease a building, a prospective lessee in Washington D.C. will now have building energy use available to factor into their decision making. In order to stay competitive in the lease market and to comply with energy reduction, benchmarking and disclosure requirements, an astute Washington D.C. property owner should consider upgrading to energy efficient building equipment and take advantage of the EPAct tax deductions supporting their investment.
The large concentration of government buildings with LEED and energy reduction mandates is greatly increasing the overall building design and skill set of the Washington D.C. building design community. This is exactly the purpose of the Section 179(D) designer benefit. Design professionals serving the government market are eligible for Section 179(D) designer tax incentives for achieving energy efficient design and they can use their new found knowledge to improve design practices outside the D.C. area. They can also apply these same techniques to the private sector portions of their practice.