Tax Opportunities for Recovering U.S. Auto Facilities
After a shaky few years and $85 billion in government aid, U.S. auto sales are on the rise1. Analysts predict that 13.5 to 14 million new cars will be purchased in the U.S. in 2012, up from 2011’s 12.8 million2. Plants previously shuddered due to the recession and poor auto sales are being reopened, and existing auto plants are being refitted and retooled. While the industry looks to cut costs and rebuild, attention should be given to the tax opportunities associated with these activities
The EPAct Section 179D Tax Opportunities
Pursuant to Energy Policy Act (EPAct) Section 179D, commercial 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 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.
Nonconditioned Building Tax Opportunities
The manufacturing facilities presented in the table have a good opportunity to generate very large EPAct tax deductions. Most industrial building facilities are nonconditioned meaning the actual manufacturing portion of the building is typically heated but not air conditioned.
In these buildings it is the lighting rather than HVAC that makes up the largest portion of energy costs. Accordingly, by combining energy-efficient lighting with energy-efficient heaters at the EPAct standard level obtaining $1.20 to $1.80 EPAct tax deductions is very achievable3.
GM recently announced they would be investing $2 billion in 17 of their U.S. auto plants across eight states4. One of the largest energy costs in manufacturing facilities is lighting. Auto facilities looking to enhance profitability should be considering lighting and HVAC retrofits to reduce operating expenses and increase the bottom line. EPAct tax incentives and bonus depreciation make now the time for these retrofits to happen. These large square footage based incentives would make it possible for the industry to potentially deduct the full cost of their retrofits.
What's it Worth?
The major players in the auto industry have over two hundred million square feet of floor space that are ripe for the deduction. If an EPAct deduction was claimed on all the spaces, the companies could receive up to almost four hundred million in deductions which represents one hundred and forty million in first-year tax saved. The chart below illustrates the EPACT tax deduction potential for large U.S. auto facilities:
Several companies based outside the U.S. have opened and expanded their facilities here. BMW opened their South Carolina facility in the 90’s and expanded in 2008 – 2010. Overall they have spent $1 billion on their U.S. facilities. These recent additions are excellent candidates for deductions and could be worth millions. Volkswagen recently opened their Chatanooga, TN auto facility. This LEED Platinum certified facility would most probably qualify for a large EPAct deduction. Now that foreign auto companies are expanding in the U.S. they need to not only consider things such as location or size, but also the potential tax savings they could realize for building an efficient facility.
Tax Incentivized Energy-Efficient Design Process Steps
The process steps for achieving an energy-efficient warehouse, distribution center or manufacturing facility are presented below:
- Assemble team including experts for EPAct tax incentives, utility rebates, lighting, heater, envelope and solar.
- 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.
- Obtain lighting design that replaces all inefficient lighting. Compare and contrast fluorescent, induction and LED lighting alternatives.
- Obtain Cambridge heater or equivalent design proposal based on proposed roof design.
- Determine utility rebate based on all proposed separate and combined measures. Lighting will reduce electrical use. Roof, insulation and heater will reduce therms.
- 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.
- Prepare project proposal integrating project cost, energy savings, utility rebates and tax incentives.
- Get project approved.
- Hire contractors and execute project.
- Have EPAct modeler and tax expert prepare IRS approved software model and tax documentation.
- Process utility rebates.
- Reduce Federal and State estimated tax payments for large tax deductions and credits.
- Celebrate tax enhanced energy-efficient building achievement.
The U.S. auto manufacturers are currently at a turning point. As they begin to restructure, it is important for them to reduce operating costs. By retrofitting their lighting and HVAC they can greatly reduce their operating costs while generating tax deductions.
3 - See, Charles Goulding, Daniel Audette, Spencer Marr, EPAct Tax Aspects of Resurging US Manufacturing Investments, Corp. Bus. Tax’n Monthly, June 2011