save some green

Save Some "Green" in 2011 & Beyond

Lenny S. Gant, CPA

Byron T. Largen, CPA

Stephen M. Lukinovich, CPA/PFS, CVA

James G. Oiler, PE

Stites & Harbison PLLC: Thirsty ThursdayMarch 24, 2011

Objectives

• Introduction to Green Construction Tax Incentives

• Construction Tax Update

• Real Estate Tax Planning

• After Tax Cash Flow Planning

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Introduction to Green Construction Tax Incentives

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Why Go Green?• Energy consumption

– Buildings represent 39% of US primary energy use– Buildings account for 39% of ALL CO2 emissions

• Electricity consumption– Buildings represent 70% of US consumption

• Water use– Buildings use 12% of ALL potable water

• Use of materials– Buildings represent 40% of raw materials GLOBALLY

• Waste– 136 million tons of building related construction

and demolition debris– 210 million tons of MSW

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Congress Extends Energy Tax Incentives:§ 179D Introduced & Extended

• Energy Efficient Commercial Building Deduction– EPAct (Energy Policy Act)

• Section 179D deduction adopted in 2005 and extended to 12/31/2013

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President Announcement - Proposal

• February 2011 - Obama proposed

• Tax credit for retrofit building– Instead of deduction

• New code Section 179F– In proposal stage

• Increase energy efficiency of older properties

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Section 179D Guidance• Energy efficient commercial building deduction

– Owner or lessee of commercial building located in the United States• Installs energy efficient property

– Lighting - 60₵/sq foot– HVAC - 60₵/sq foot– Building Envelope - 60₵/sq foot

• Obtain a certification• Inspected and tested by “qualified” individuals

NOTE: Rental apartment buildings 4 stories or more; "Primary Designers” of government buildings

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What’s It Worth?

Note: For government buildings, these deductions are allocated to the “primary designer.” Section 179D deductions cannot be greater than the actual cost incurred.

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Square Lighting HVAC Bldg Envelope TotalExample Footage Deduction Deduction Deduction §179D

Bldg of Property $.60/SQ FT $.60/SQ FT $.60/SQ FT $1.80/SQ FTA 50,000 30,000$ 30,000$ 30,000$ 90,000$ B 100,000 60,000$ 60,000$ 60,000$ 180,000$ C 250,000 150,000$ 150,000$ 150,000$ 450,000$ D 500,000 300,000$ 300,000$ 300,000$ 900,000$ E 750,000 450,000$ 450,000$ 450,000$ 1,350,000$ F 1,000,000 600,000$ 600,000$ 600,000$ 1,800,000$

First Movers

• Retailers Energy is major cost• Distribution Centers Major growth market• Hotels Meet ASHRAE 2004• Parking Garages Large facilities• Industrial Facilities Large facilities• Office Buildings More states enact ASHRAE

2004• Apartments Must be at least 4 stories

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§ 179D Interim Lighting Rules• Meet w/ft2

• Additional requirements:– Bi-level Switching– Meet ASHRAE 90.1 requirements– Meet IESNA minimum

light levels

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2001 Standard

LPD, W/ft225%

Improvement40%

ImprovementOffice 1.3 0.975 0.78Manufacturing 2.2 1.65 1.32School/Library 1.5 1.125 0.9Retail 1.9 1.425 1.14Warehouse 1.2 50% required, 0.60

% Improvement 25% 26% 27% 28% 29% 30% 31% 32% 33% 34% 35% 36% 37% 38% 39% 40%Tax Deduction $/sq.ft. 0.30 0.32 0.34 0.36 0.38 0.40 0.42 0.44 0.46 0.48 0.50 0.52 0.54 0.56 0.58 0.60

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Section 179D Lookback Rules

• Announced by IRS in December 2010• Applies for prior year missed §179D

– Now available for more than 3 previous tax years• Do not amend prior-year tax returns• Reflect prior year § 179D deductions missed on

current year tax return - Form 3115, § 481(a) full year deduction - Federal, AMT and State

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• Federal tax credits for installation on commercial property– 30% tax credit for solar fuel cells and small wind

mills– 10% tax credit for geothermal units– Tax credits are available for eligible systems placed

in service by December 31, 2015– Reduce tax basis in year property is placed in

service by 1/2 the tax credit

Federal Energy Investment Tax Credits

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Construction Tax Update

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Primary Designer - ContractorsGovernment Buildings

• New or retrofit?• Who is considered primary designer?

– Architects, Engineers, etc.• Which jobs qualify for this free deduction?• How do primary designers achieve this benefit?• Will I get audited?• Does the property need to be certified?• Who can certify the property?

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Home Builder Tax Credits:Federal & Kentucky

• Effective 1/1/06 - 12/31/11 $2,000 Federal tax credit – Home Builder energy efficient home

• Need certification• Applies to residential homes, not rental properties or

commercial properties• Builder receives the tax credit - limited to AMT• Beginning 1/1/2009 $850 Kentucky tax

credit for Home Builder– Limited to LLET - upsetting

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Proposed H.R. 6097: Provisions

• Increase completed-contract threshold from $10 million to $40 million

• Index threshold going forward• Eliminate AMT adjustment for long-term

contracts• Threshold: Three-year average of gross receipts

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Proposed H.R. 6097: Impact

• Enables more contractors to report long-term contracts on method other than percentage-of- completion

• Eliminates look-back method for contractors under $40 million

• Estimated to impact 95% of contactors

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3% Government Withholding Tax

• Effective 1/1/2012, current law, requires 3 (three) percent Federal withholding tax on certain payments...

• by the federal government and every state government (including political subdivisions and instrumentalities)…

• to persons providing property or services, regardless of whether the government entity making the payment is the recipient of the property or services

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Real Estate Tax Planning

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Federal & Kentucky Real Estate Tax Incentives

• 2010 Tax Law – Federal & Kentucky

– Through 12/31/2012

– Future Federal tax law effective 1/1/2013?

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Bonus & Section 179 for Real Estate• 50% bonus depreciation for QLHI property - reinstated

effective 1/1/2010 - 9/8/2010; 100% bonus 9/9/2010 - 12/31/2011; 50% Bonus QLHI 1/1/2012 - 12/31/2012

• Doubling Section 179 - $500,000 for 2010 - 2011

– Phase-out threshold increased to: $2M - $2.5M

– 1/1/2012 - 12/31/2012 §179 $250,000

• New: qualified real property eligible for special §179 expenses - up to $250,000 included in $500,000 annual limit: 1/1/2010 - 12/31/2011

• Not available in Kentucky

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$250,000 §179 Qualified Real Property Deduction

• Qualified Leasehold Improvement Property– Watch related party rules– 3 year old or older property

• Qualified Restaurant Property (not eligible for bonus)

• Qualified Retail Property (not eligible for bonus)

• Not available in Kentucky

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50% Bonus Depreciation

• Qualifying Property - new or first use– MACRS property with a recovery period of 20 years or

less – 5 yr, 7 yr, 15 yr land improvements

– Computer software

– Qualified leasehold improvement property – normally 39 year property

– Not available for Kentucky

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Bonus or No Bonus?

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30% - 50% Bonus

No Bonus 50% Bonus 100% Bonus 50% BonusNo

Bonus9/11/2001 - 12/31/2004

1/1/2005 - 12/31/2007

1/1/2008 - 9/8/2010

9/8/2010 - 12/31/2011

1/1/2012 - 12/31/2012

1/1/2013 -

5 YR 5 YR 5 YR 5 YR 5 YR 5 YR

200 DB 200 DB 200 DB 200 DB 200 DB 200 DB

7 YR 7 YR 7 YR 7 YR 7 YR 7 YR200 DB 200 DB 200 DB 200 DB 200 DB 200 DB15 YR 15 YR 15 YR 15 YR 15 YR 15 YR

150 DB 150 DB 150 DB 150 DB 150 DB 150 DB

27.5 YR 27.5 YR 27.5 YR 27.5 YR 27.5 YR 27.5 YR

S/L S/L S/L S/L S/L S/L

39 YR 15 YR 15 YR 15 YR 39 YR 39 YR

S/L Bonus

S/L S/L S/LS/L

BonusS/L

No Bonus

39 YR 39 YR 39 YR 39 YR 39 YR 39 YR

S/L S/L S/L S/L S/L S/L

Qualified Leasehold Improvements

Commercial Building - Exterior No Bonus

Type of Property

Computer, Carpet, Wiring

Furniture, FixturesLand Improvements

Residental Building - No Bonus

Rental Real Estate:Tax Treatment

• Tax rules for activities involving rental real property– Passive activity - Under §469, passive activity losses are

limited to passive activity income– Active participation - Up to $25,000/year of rental

losses against non-passive income• Taxpayer and spouse own at least 10% of rental property• Substantial involvement in managing the property• AGI phase out starting at $100,000 through

$150,000

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Related Property:Other Limitations

• Related party activities involving passive rental real estate property– Passive activity

• Net income from rental property between related parties is generally considered non-passive; cannot use income to offset other passive losses

• Net loss from rental properties between related parties is subject to §469, subject to normal passiveloss rules

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• Real estate professional status– Permits treating passive rental losses as ordinary, non-

passive losses– Need 5% ownership of real estate activities– Can only aggregate rental real estate activities

• Economic unit status– Grouping is an opportunity for operating companies

with related rental real estate activity(ies)– Related activity treated as “one unit” for tax

treatment purposes

Converting Passive Rental Real Estate Losses to Non-passive

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Kentucky Energy Tax Credits• Business energy efficient tax credit, up to $1,000• Kentucky commercial property owners 30% tax credit for

installing certain energy improvements: – Energy efficient interior lighting system - $500 maximum– Energy efficient heating, cooling, ventilation or hot water

systems - $500 maximum– The total maximum commercial tax credit is $1,000 per

taxpayer. Any unused tax credits can be carried over one year. – Commercial properties for this purpose do not

include residential rental units• Effective 1/1/2009

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1/1/2013, Federal Tax Law?

• Top income tax rates increase, effective 1/1/2013?– 33% to 35%– 36% to 39.6%

• Long-term capital gain tax rate, effective 1/1/2013?– 15% to 20%

• Earnings tax > $250,000 - Medicare tax increase• Enhance Section 179D - deduction vs. credit

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After Tax Cash Flow Planning:Cost Segregation

Energy Efficient Design

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• Investor’s point of view– What is it?– History– What is included?– Why do it?– Applied to what?– Case study– Retrofit example - lighting– Energy Study

Cost Segregation

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Cost Segregation

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• What is it?– Engineering replication/analysis of real estate cost

to identify short-lived assets• History

– 1997 HCA court case– 2004 IRS guidelines

• What is included?– Hard costs– Soft costs

Cost Segregation:Investor’s Point of View

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• Why do it?– Cash flow (non-cash depreciation expense taken

sooner)– Asset management (some restrictions and

limitations)• HVAC units, lighting fixtures, shingle roof

Note: Must know the “single” asset cost to write off


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• Actual case study– 20,000 sq. ft. office building – energy efficient

design

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Case Study

Case Study

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Energy Efficient Design• Retrofit example

– There are certain limitations for cost segregation inclusion—level of detail

– Without cost segregation• No expense write-off upon disposal/replacement

– $200,000 Light Fixtures• 10 years old• $150,000 non-cash expense taken upon retrofit

with new fixtures

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Energy Efficient Design

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Case Study

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Cost Segregation Combined with Energy Efficient Design: Case Study

TYPE: Office BuildingSIZE: 20,000± Sq. Ft.IN-SERVICE DATE: June 26, 2009NEW PROPERTY

Office BuildingWithout Cost Segregation

With Cost Segregation

5 Year Property None 923,400$ 15 Year Property None 46,50039 Year Property 3,321,600$ 2,351,700Total Bldg Cost 3,321,600$ 3,321,600$

SUMMARY:Energy Property Federal Tax Credit: 54,700$ §179D Deduction: 36,000$ First Year After Tax Cash Flow: 300,000$ 10 Year Net Present Value: 356,000$

ASSUMPTIONS:41% Combined Federal & State Income Tax Rate7% Discount Rate(numbers rounded and some estimates)

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Questions?

IRS Circular 230 Disclosure

As a result of perceived abuses, the Treasury has recently promulgated Regulations for practice before the IRS. These Circular 230 regulations require all accountants to provide extensive disclosure when providing certain written tax communications to clients. In order to comply with our obligations under these Regulations, we would like to inform you that any advice given in this presentation, including any attachments, cannot be used to avoid penalties which the IRS might impose, because we have not included all of the information required by Circular 230, nor have we performed services that rise to this level of assurance.

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Thank You!

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Lenny S. [email protected]

Byron T. [email protected]

Stephen M. [email protected]

Jim G. [email protected]

502.749.1900www.mcmcpa.com