The Energy Tax Aspects of Auto Dealer Re-Imaging Programs
In the aftermath of a severe economic downturn in the auto sector the total number of auto dealer facilities has shrunk from some 22,000 to 18,000. The remaining dealers, and in particular the three major domestic dealers namely GM, Ford and Chrysler, are focused on what the industry calls reimaging, which includes substantial dealer facility renovations. A major reduction in the number of domestic brands and manufacturer mandated closure of a particularly high number of domestic dealerships enables the manufacturers to require and support comprehensive facility renovations on the remainng dealer facilities. When these renovations meet Energy Policy Act (EPAct) energy efficiency standards dealers can obtain substantial tax savings1.
The EPAct Tax Opportunity
Pursuant to Energy Policy Act (EPAct) Section 179D, car dealership 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 60 cents per square foot for each of the three major building subsystems: lighting, HVAC 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.
The following chart illustrates the potential EPAct tax deductions for an average size car dealership and for all car dealerships in the U.S.:
Domestic Brand Reduction
The domestic auto car dealers have undergone a substantial reduction in facilities as a result of manufacturer directed closures and major brand terminations. The largest dealership facility reduction has been at General Motors which has slimmed itself down to 4 brands namely Cadillac, Chevy, Buick and GM after jettisoning Oldsmobile, Pontiac, Saab, Saturn and Hummer. Ford has eliminated Mercury and sold Volvo. Chrysler has merged with Fiat, giving Fiat a major U.S. distribution network for its more fuel efficient product line.
Reimaging Energy Tax Planning
The key with dealership facility reimaging tax planning is to balance the manufacturers brand focused strategy with the individual dealers need to minimize operating costs. Recently reported dealer data indicated that the average Chrysler dealer’s pre-tax earning fell to $150,000 during the economic downturn. This means that a 15,000 reduction in facility energy operating costs equates to a 10% increase in pre tax earnings. Manufacturers like striking, generally cost-ineffective, showrooms to drive customer traffic; whereas, dealers need to manage overall facility operating cost, which includes service bays, collision shops, and parts storage. Manufacturers want national multi-brand dealers to focus on their own brands but multi brand dealers need to optimize the back of the house (spaces besides the showroom) shared facility costs savings to remain competitive.
GM has launched the largest and most wide-spreading reimaging plan out of the domestic car dealers. They sent inspectors to analyze all of their dealerships in terms of appearance, location and overall quality. Many dealerships that were fortunate enough to not be shut down are now being forced to relocate, part with their foreign car brands and make major facility upgrades2. GM dealers should strive to upgrade to energy efficient technologies as part of their required facility upgrades.
How to Energy Tax Plan
Some of the major manufacturers are funding showroom upgrades. Dealers should take this opportunity to have the assigned design teams, lighting suppliers and electricians upgrade the non show room space to high energy efficiency levels at the same time. Once the project teams are going to be on site anyway there are major cost synergies from having the non showroom spaces concurrently retrofitted.
Dealerships that have not upgraded lighting in the past five or more years often have inefficient T-12 or metal halide lighting whose production or importation is now banned by the federal government. Therefore, sooner or later these dealers will be forced to upgrade to more efficient lighting like T-5 and T-8 fluorescents, or the new highly efficient LED lighting.
Another way to improve building lighting efficiency, while keeping up with the manufacturer reimaging design requirements, is the use of natural lighting during daytime hours3. Natural lighting can be used in several ways by integrating sensors with large showroom windows and/or skylights 4.
When upgrading, a car dealer should always look to local utilities and the state government for energy efficient equipment installation rebates. Rebates vary in size, but at times can be substantial. For example, one dealership in Vermont recently upgraded to T-8 lighting among other energy efficient retrofits, and the owner expects to get all but $4,000 of the project cost back through rebates5.
Outside Lot Lighting
Many dealers have large outside lots that use energy intensive prior generation lighting. Although there are no tax incentives for upgrading outside lighting, there are typically meaningful utility rebates for performing this upgrade. Besides substantial energy cost savings there are tremendous maintenance cost savings related to retrofitting outside lighting, particularly with very long life LED lighting and induction lighting products that are increasingly popular with these applications.
Service Bay and Collision Shop Heaters Enhanced EPAct tax Deductions
Once the service bay and collision shop areas upgrade their lighting they have an opportunity for $1.20 to 1.80 EPAct tax deductions for upgrading to high energy efficiency natural gas heaters. The lighting must be upgraded first since lighting is the biggest energy user in non air conditioned spaces and the required IRS approved EPAct tax software model will only support tax deductions when energy efficient lighting is combined with an energy efficient heater6.
Dealer tax advisers need to stay current on showroom reimaging programs and advise their clients to consider the synergies from concurrently retrofitting the non showroom spaces. Energy costs comprise a meaningful portion of dealer earnings and today’s building products can combine with utility rebates and EPAct tax savings to reduce costs.
The reimaging of domestic car dealerships is one of the early steps of the major overhaul that the U.S. car industry needs and EPAct tax incentives can be an important part of these initiatives.
1 - See Charles Goulding, Jacob Goldman & Raymond Kumar, Energy Tax Aspects of Car Dealerships, Corp. Bus. Tax’n Monthly, July 2009, at 11.
2 - See David Welch, GM Will Push Dealers to Upgrade, Bloomberg Business Week, < http://www.busin essweek.com/bwdaily/dnflash/content/sep2009/db20090915_870120.htm?chan=rss_topDiscussed_ssi_5>, Sep 15, 2009.
3 - See Charles Goulding, Jacob Goldman and Taylor Goulding, The Tax Aspects of “Daylight Harvesting”, Corp. Bus. Tax’n Monthly, Aug 2008, at 35.
4 - See NADA Greener Dealership Case Studies, <http://www.nada.org/green/greenstores/casestudies/greener_ studies.htm>.
5 - See NADA Greener Dealership Case Studies,
6 - See Charles Goulding, Jacob Goldman and Raymond Kumar, Large EPAct Energy Tax Deduction Opportunities for Commercial Heaters, Corp. Bus. Tax’n Monthly, Jan 2010, at 11.