Making a commitment to an environmentally friendly enterprise means not only doing the right thing, but saving on taxes, too.
By Carolyn Tang
What if your tax advisor suggested you build a roof garden? It may sound a bit off the wall at first, but you’d actually be headed for a considerable tax benefit—and an environmental saver.
You’ve only to look at Honda’s efforts to confront the issues of auto fuel economy and emissions, Continental Airlines’ work to engineer more fuel-efficient aircraft, Suncor’s refinery emission monitoring, Goldman Sachs investment in alternative energy sources, Hewlett-Packard’s e-waste recycling plants, HSBC’s paper recycling and energy-efficient lighting system initiatives, and Wal-Mart’s supply-chain clean up to realize that “going green” is increasingly the mantra of today’s major companies—both for ethical and tax-saving reasons.
According to Nancy Wertheim, US managing partner for retail, wholesale and distribution with Deloitte Tax LLP, “clean and green” business practices can contribute to enhanced financial performance and shareholder value by optimi-zing the corporate tax position via credits and other incentives.
As Wertheim puts it, “Green power is smart business, and financial decision-makers interested in exploring tax-related benefits need to get up to speed on where to find those opportunities.”
Here, we take a look at a few of the tax benefits that could have you finding green by going green.
Green Roofs “There are various tax incentives to installing green roofing systems,” explains Thomas Kral, founder and general manager of Reliable American, Inc., a licensed roofing contractor for the greater Chicago area. “A properly constructed garden roofing system qualifies for LEED (Leadership in Energy and Environmental Design) certification for tax benefits.”
Candidates for LEED certification submit their projects to the US Green Building Council, and earn credits based on sustainable site development, water savings, energy efficiency, materials selection and indoor environmental quality. Projects are awarded Certified, Silver, Gold or Platinum certification, depend-ing on the number of credits they have received. Various states offer tax incentives or benefits for achieving certain levels of certification. New York and Oregon, for example, currently offer tax credits for LEED-certified buildings, and Illinois is considering requiring LEED certification of public projects.
“From an environmental standpoint, the placement of enough garden roofs will reduce what is called the ‘urban heat island effect,’ which is essentially the enormous number of old black roofs absorbing and storing heat. Less black means less heat,” says Kral.
They also serve to improve a building’s overall energy efficiency. “The garden roof should act as an insulator for the building, reducing the energy used by that building to heat and cool its conditioned spaces,” Kral adds.
Commercial Energy Efficiency The Energy Policy Act of 2005 estab-lished tax deductions for owners of energy-efficient commercial buildings. Taxpayers can deduct as much as $1.80 per square foot if they install systems that reduce a building’s total energy and power cost by 50 percent or more. Energy savings can be calculated using qualified computer software approved by the IRS. Buildings below the 50-percent threshold are able to qualify for a $0.60 per-square-foot deduction if they meet a 16 2/3-percent energy savings target. To be eligible, the energy-efficient commercial building property must be placed in service between January 1, 2006 and December 31, 2008. These tax deductions would reduce a taxpayer’s overall taxable income, with the value of the deduction being dependent on the applicable tax bracket.
Energy Star, a joint program of the US Environmental Protection Agency (EPA) and the US Department of Energy, recommends improving a building’s lighting system as one of the first steps in increasing energy efficiency. “This is not only because lighting upgrades are so cost-effective, but also because less heat is gen-
erated from efficient lighting systems, affecting the proper sizing of more capital-intensive heating and cooling systems,” explains Ari Goldberg, an Energy Star spokesperson.
Goldberg says that by simply employing dual-switching processes in the lighting system, you would be able to switch off roughly half the lights and still have fairly uniform light distribution. In the meantime, you would be reducing installed lighting by about 25 percent.
“As lighting power reductions climb from 25 percent to 40 percent, the deduction is increased proportionally,” he explains.
In order to identify the best opportunities to qualify for the energy-efficient commercial building tax deduction, Goldstar recommends the following three steps:
- Establish the energy use of the commercial building and set a savings goal using the Environmental Protection Agency’s national energy performance rating system (which can be found at www.energystar.com/benchmark). The EPA encourages starting with a modest 10-percent savings goal.
- Design new buildings to achieve top energy efficiency.
- Improve lighting systems.
Eugene Minnick, chief architect and sustainable design manager for MWH Global, a Colorado-based environmental engineering and construction company, points out that such energy-saving improvements can be applied to existing commercial structures. “Energy-saving improvements might include adding insulation to the building, replacing incandescent lighting with compact fluorescent bulbs, replacing existing equipment with Energy Star products, and installing motion sensors for lighting,” he explains.
Additionally, Minnick suggests that using natural ventilation, along with daylighting and sun-control measures, can further red-uce the need for cooling capacity and artificial lighting.
Alternative Energies The Energy Policy Act also provides a tax credit for businesses that utilize qualified solar water-heating and photovoltaic systems, and for certain solar-lighting systems. This credit was extended through December 31, 2008 by Section 207 of the Tax Relief and Health Care Act of 2006. The tax credits are for 30 percent of the cost of the system.
In order to qualify, solar water-heating systems must be certified for performance by the Solar Rating Certification Corporation (SRC) or a comparable entity endorsed by the state government in which the system is located. Unlike the tax deductions provided for energy-efficient commercial buildings, tax credits reduce the amount of tax owed dollar for dollar. The credits are available for systems placed in service between January 1, 2006 and December 31, 2008.
It should be noted that, according to the Solar Energy Industries Association (SEIA) Guide to Federal Tax Incentives for Solar Energy, “[A] commercial solar credit cannot be used to reduce a taxpayer’s regular income taxes by more than 75 percent of what the taxpayer would otherwise pay, or below the taxpayer’s alter-
native minimum tax amount, whichever is lower.”
A tax credit is also available for businesses that use fuel cells and/or microturbines as sources of power. Fuel cells generate electricity by means of a chemical process, while microturbines are small power-generation systems that run on a gas turbine engine. For fuel cells, businesses can gain tax credits for up to 30 percent of the cost of the system, or up to $1,000 per KW of power that can be produced. For microturbines, credits are for 10 percent of the cost, or up to $200 per KW of power that can be produced. To qualify, systems must be placed in service during 2006 and 2007.
CREBs Benefits The Energy Policy Act also provides electric cooperatives and public power systems with Clean Renewable Energy Bonds (CREBs). These tax credit bonds are the equivalent of an interest-free loan for financing qualified energy projects.
“The Treasury Department specifically allocates bond issuance authority to qualifying projects that meet specific criteria, including the production of energy from renewable resources. The holder of these bonds can claim a tax credit in lieu of tax-exempt interest,” Wertheim explains.
The IRS recently allocated $800 million of bond authority to 601 renewable energy projects in the United States. An additional $400 million of bond authority was made available in 2007, and Congress is considering further legislation to expand the program.
Hybrid Vehicles “People buy hybrids because they want to make an environmentally friendly purchase,” explains Jim Kliesch, a spokesperson for the American Council for an Energy-Efficient Economy. “The more fuel a vehicle burns, the more greenhouse gases go into the atmosphere. So hybrids go a long way towards curbing global warming,” he says.
However, if that isn’t enough incentive, tax credits are available for businesses that add commercial heavy-duty hybrids into the corporate fleet. The credit is defined as a percentage of the vehicle’s incremental cost, where that percentage is determined by the hybrid’s fuel-economy improvement relative to a comparable conventional vehicle. The incremental cost, in turn, is defined to be the cost of the vehicle above the cost of the conventional vehicle; however, the amount of the increment is capped by weight.
The maximum credit available is $3,000 for a vehicle weighing 8,501 to 14,000 pounds, $6,000 for a vehicle weighing between 14,001 and 26,000 pounds, and $12,000 for a vehicle weighing more than 26,000 pounds. The credit is available for heavy-duty hybrid vehicles placed in service between January 1, 2006 and December 31, 2009.
Efficient Appliances For the 2006 and 2007 tax years, manufacturers of energy-efficient appliances such as washing machines, dishwashers and refrigerators, are also eligible for a tax credit for each type of appliance produced. The credits range from $100 for washing machines that meet the 2007 Energy Star criteria, to $175 for refrigerators that save 25 percent or more relative to 2001 federal standards.
According to Wertheim, “The maximum overall credit that may be claimed by a taxpayer is between $20 million and $75 million, depending on the type of energy-efficient appliance manufactured.” (For more information, see IRS Form 8909, Energy Efficient Appliance Credit.)
No Setting Sun A survey of Fortune 100 companies across several industries conducted by A.T. Kearney and the Institute for Supply Management, found that approximately 60 percent of businesses have taken on environmentally sustainable practices in response to consumer demand for greener processes and products. Furthermore, more than 50 percent of companies are opting not to work with suppliers that do not meet sustainability standards.
Wertheim asserts that the focus on environmentally friendly commercial tax savings is driven by renewed interest in environmental issues in not only the consumer, but also the commercial and government arenas. “It’s a confluence of events. Consumers are more conscious of environmental issues. Likewise, governments have been instituting eco-friendly policies. And companies—even those that would be environmentally conscious anyway—always should be aware of and take advantage of tax savings opportunities.”
As more and more major corporations jump on the bandwagon, social responsibility and tax benefits increasingly will become front-of-mind issues for business leaders and their tax advisors.
Chicago’s Green Tax Incentives
Gain additional tax benefits by building or upgrading a green-friendly, tax-reducing commercial structure on qualifying real estate.
The Cook County Assessor’s Office offers the following real estate tax incentives that lower property tax burdens for new and expanding businesses. For qualifying projects, rates can be lowered by more than 50 percent for up to 12 years.
Here are a few examples:
Class 6(b): Provides a reduced level of assessment to properties that are primarily used for industrial purposes, where the owner has substantially rehabilitated an existing facility or reoccupied an abandoned one. The property receives a 16-percent assessment level for the first 10 years, 23 percent in the 11th year, and 30 percent in the 12th year before returning to the full 35-percent industrial assessment level in the 13th year.
Class 6(c): Intended for contaminated or abandoned properties or contaminated vacant land that will be remediated and used for industrial purposes. The property receives a 16-percent assessment level for the first 10 years, 23 percent in year 11 and 30 percent in year 12, before returning to the full assessment level in year 13.
Class 7: For commercial properties located in areas in need of commercial development. This incentive extends to new or substantially rehabilitated facilities or to reoccupied abandoned properties. The property receives a 16-percent assessment level for the first 10 years, 23 percent in the 11th year and 30 percent in the 12th year, before returning to the full 38-percent assessment level for commercial properties in the 13th year.