The EPAct Tax Aspects of the U.S. Military Supply Chain

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Introduction

Beginning in January of 2013, $55 billion in military budget cuts are set to take place. These cuts in military spending are only a fraction of the $487 billion in projected defense spending reductions set to place over the next ten years1. Of the major defense contractors, almost all but one get over fifty percent of their sales from the U.S. government, Northrop Grumman being the largest at ninety percent 2. Defense contractors must adapt to these deficit-reducing measures. These corporations should examine energy-efficiency projects and tax incentives to cut costs and help remain viable in this volatile market.

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.

Facilities Retrofits

In manufacturing and warehouse facilities, lighting is the largest energy consumer. Defense contractors should first focus on retrofitting federally-banned certain metal halide and all T12 lighting fixtures in their facilities and then focus on their most inefficient facilities. With today's energy efficient lighting, retrofits in warehouse and manufacturing facilities often qualify for $1.80 per square foot EPAct deductions. Lighting retrofits in these types of facilities are very economically feasible and after considering all rebates and incentives often have paybacks of about two years. The below chart demonstrates the total potential EPAct incentives for four major defense contractors:

Company Name

Facilities Square Footage

Total Potential EPAct Deduction

Boeing 84,776,000 $152,596,800
General Dynamics 52,800,000 $95,040,000
Northrop Grumman 37,397,000 $67,314,600
Raytheon 29,430,973 $52,975,751

Military Embraces EPAct

At the top of the defense supply chain is the military themselves, and they have already embraced energy efficiency as a major policy goal. Primary designer's of the military's energy efficient projects can claim the EPAct deductions under the primary designer laws. In this case the military benefits from the perpetual energy savings and designers have an incentive to design these energy efficient projects.

The U.S. Army and Navy have both greatly benefitted this program and have both developed military protocols to process these deductions in a fair and efficient manner3,4. In the Army's case, they currently have an energy efficiency task force and these energy efficient retrofits will help them achieve their energy reduction goals 5.

Augmenting The Defense Supply Chain

Once defense contractors analyze and retrofit their own facilities they should focus supply chain initiatives to incentivize their suppliers to follow suit. Walmart has enacted an energy efficiency program for their suppliers6. By sending their employees to audit their suppliers facilities they were able to cut their supplier's and their own costs. With the impending defense spending cuts, the defense contractors should aim to be as efficient as possible in their operations, and that includes utilizing energy efficient suppliers.

Military Supply Chain - Primary Suppliers

Military Supply Chain First Tier Suppliers

LEED EPAct Opportunities

LEED, or Leadership in Energy and Environment Design, is a building standard developed by the U.S. Green Building Council (USGBC) . Buildings built to this standard are by definition efficient and often qualify for $1.20-$.180 in EPAct deductions. Many defense contractors have LEED buildings in their portfolio. They should certainly evaluate their portfolio and make an effort to capture EPAct on their existing and future facilities .

Change of Accounting

Since the enactment of EPAct in 2006, defense contractors have most likely completed qualifying retrofits and new constructions. The IRS allows for corporations to submit a 3115-change in accounting to go back and claim previously missed deductions. Defense contractors should evaluate previous completed retrofits; these projects will be a source of "easy money" for the industry and will require minimal work to capture.

Conclusion

Defense contractors should follow the military's lead and work on reducing their facilities energy costs and operations. Energy efficiency projects typically have good economic paybacks A leaner military budget will mean lower revenue for defense contractors so these corporations should consider all opportunities to reduce operating costs.

1 - http://abcnews.go.com/US/wireStory/report-automatic-defense-cuts-undercut-obama-plan-16519961#.T9iYv7VYuUI

2 - The Wall Street Journal, Defense Chiefs Signal Job Cuts, Nathan Hodge

3 - US Army Corps of Engineers - Engineering and Construction Bullet, No. 2011-8

4 - NAVFAC - Engineering & Construction Bulletin, Issue No. 2012-04

5 - http://www.prnewswire.com/news-releases/huntsville-center-requests-comments-on-draft-request-for-proposal-related-to-energy-contracts-140338293.html

6 - The EPAct and Alternative Energy Tax Aspects of Walmart's Supplier Sustainability Program, Charles Goulding, Jacob Goldman and Christopher Winslow

7 - http://www.usgbc.org/DisplayPage.aspx?CMSPageID=1988

8 - Advanced LEED Building Energy Tax Planning, Charles Goulding, Jacob Goldman, and Daniel Audette

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