The Energy Tax Aspects of Illinois Warehousing Base

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Lawmakers in Illinois have been busy throughout the first half of 2011 enacting several monumental pieces of legislation aimed at revitalizing warehouses along the riverfront in Peoria and other cities. The current focus on the warehousing industry in the state reflects a long history of Illinois warehouses playing a pivotal role in the state’s economy.

At the same time, there has been a renewed focus on energy-efficient electricity distribution in the state, with the state legislature and Governor Quinn currently in talks to deliver a final bill to regulate energy utilities. Perhaps no building category in the state will be more affected by these proposed regulations than warehouses, due to the immense scale of Illinois warehouse square footage. In order to make the most energy-efficient use of their warehouse space with the best economic return, warehouse owners in the state will want to reach energy efficiency targets that will qualify their properties for federal and state EPAct tax deductions.

The EPAct Section 179D Tax Opportunities

Pursuant to Energy Policy Act (EPAct) Section 179D, Illinois warehouse 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 Section 179D $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

There are multiple 30% or 10% tax credits available through the American Recovery and Reinvestment Act to Illinois warehouse owners for a variety of alternative energy measures, with varying credit termination dates. For example, the 30% solar tax and fuel tax credits expire January 1st 2017 while the 10% Combined Power tax credit also expires January 1st 2017. The 30% closed loop and open loop biomass credit expires January 1st, 2014.

All alternative energy measures that are eligible for the 30% and 10% tax credits are also eligible for equivalent cash grants for the three years staring January 1st 2009 and ending December 31st 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.

The Illinois Warehouse Sector

Illinois is integral to the meatpacking and distribution industries because of the state’s prominent place at the center of the nation’s commodity trading, particularly in foodstuffs and industrial equipment. Thus, Illinois is a gateway for meatpacking, food processing, manufacturing, and order fulfillment, requiring vast amounts of warehouse square footage. Further, Illinois is centrally located between the East coast and Midwest, meaning that the state is a corridor for trade not only within the state but for the entire country.

Illinois’ central location makes for a substantial warehousing base that is primed for large tax savings.

The Illinois Tax Opportunity

The following chart summarizes the EPAct 179D tax opportunities available to many of Illinois’ largest warehouse facilities:

Illinois Warehouse EPAct benefits

In order to effectively capture the full EPAct tax savings, Illinois warehouse owners will need to concentrate on upgrading the building’s lighting, HVAC, and building envelope in addition to considering alternative energy generation to qualify for tax credits.

Lighting

Building lighting comprises a large portion of warehouse energy use. Most warehouses that have not had a lighting upgrade to energy-efficient lighting in the last 7 or 8 years utilize prior generation metal halide or T-12 fluorescent lighting. It is also important to realize that effective January 1, 2009 most probe-start metal halide lighting may no longer be manufactured or imported into the United States and effective July 1, 2010; most T-12 lighting may no longer be manufactured or imported into the United States. This means that warehouses that still have this lighting technology will soon be subject to large price increases for replacement lamps and bulbs.

This prior generation T-12 and metal halide lighting is very energy inefficient compared to today's T-8 and T-5 lighting, and a lighting retrofit can easily reduce lighting electricity costs by 40 to 60 percent. In addition to large energy cost reduction from the base building lighting, most warehouses undergoing lighting retrofits install sensors that completely shut off the lighting in portions of the warehouse that are not in use. Previously, many warehouse owners and lighting specifiers were reluctant to install sensors because they reduced fluorescent lamp useful life. Today, improved technology sensors are available with warrantees not to reduce lamp useful life.

Heating

New, improved commercial heating systems can provide energy cost savings of eight percent or more over the ASHRAE 2001 building code standards. There are multiple heater technologies suitable for manufacturing facilities, including direct fired gas heaters, unit heaters, and infrared (radiant) heaters.

If feasible, the warehouse heater should be mounted on an exterior wall to optimize the roof top solar P.V. space.

An example illustrating the maximum utilization of the $1.20 EPAct tax deduction for a 100,000 sq ft facility with an energy-efficient heater is as follows:

100,000 sq ft warehouse deduction

With this example, the $120,000 (100,000 sq ft x $1.20) entire investment EPAct tax deduction will be achieved as long as the combined lighting heater project reduces total energy cost by 33 1/3% as compared to ASHRAE 2001.

Building Envelope

If a warehouse requires re-roofing the owner should consider a more energy-efficient white roof. Moreover, re-roofing is the ideal time to consider adding more insulation. If the building already had an energy-efficient design and roof the owner may want to consider upgrading to more energy-efficient truck bay doors and windows.

100,000 sq ft warehouse deduction 1.80

With this example the maximum $180,000 EPAct tax deduction (100,000 sq ft x $1.80) will be available as long as the combined lighting, heater and roof project reduces total energy cost by at least 50% as compared to ASHRAE 2001.

Warehouse Tax Incentivized Energy-Efficient Design Process Steps

The process steps for achieving an energy-efficient Illinois warehouse facility are presented below:

1.Assemble team including Warehouse experts for EPAct tax incentives, utility rebates, lighting, heater, envelope and solar.

2.See if roof is compatible for solar and heater. Obtain solar and any needed roof/insulation proposals. Make sure existing roof warranties are compatible with solar P.V. installation.

3.Obtain lighting design that replaces all inefficient lighting. Compare and contrast fluorescent, induction and LED lighting alternatives.

4.Obtain Cambridge heater or equivalent design proposal based on proposed roof design.

5.Determine utility rebate based on all proposed separate and combined measures. Lighting will reduce electrical use. Roof, insulation and heater will reduce therms.

6.Determine tax incentives including EPAct tax deduction benefit and solar credit tax deductions. EPAct will be based on total project square footage, including mezzanines and pick and pack modules. The 30% solar tax credit will be based on the combined solar material and installation costs.

7.Prepare project proposal integrating project cost, energy savings, utility rebates and tax incentives

8.Get project approved.

9.Hire contractors and execute project.

10.Have EPAct modeler and tax expert prepare IRS approved software model and tax documentation.

11.Process utility rebates.

12.Reduce Federal and State estimated tax payments for large tax deductions and credits.

13.Celebrate tax enhanced energy-efficient warehouse achievement.

Conclusion

As described above there are multiple compelling reasons including energy and substantial tax savings why Illinois area warehouse owners are acting on energy-efficient projects. This is such a widespread phenomenon that market forces will require manufacturers to upgrade just to remain competitive.

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