Energy-Efficient Opportunity

Retail business tax strategies ring up substantial savings when it comes to energy efficiency.

In today’s economic climate, it’s essential for retail business owners to take advantage of every tax opportunity available to minimize your tax burden and maximize cash flow. Would you believe that energy-efficient upgrades to your building or retail space could actually pay for themselves through tax deductions, in addition to realizing future savings on energy costs? Did you know that the new equipment you leased or purchased for your business in 2011 could allow you to claim a large, one-time deduction on your next tax return?

Thanks to §179D of the Energy Policy Act of 2005, energy-efficient improvements to your retail space can save you more than you might think. §179D allows tenants and building owners to qualify for tax deductions for implementing energy efficiency components in commercial buildings. These deductions are applicable to buildings that were either built or retrofitted after December 31, 2005, and must be certified by a qualified third party.

Lighting and HVAC systems are a great place to start when considering making energy efficiency improvements that qualify under §179D. Qualifying improvements to lighting, HVAC and the building envelope entitle taxpayers to $0.60 per square foot for each component, for a possible total of $1.80 per square foot. With energy savings and §179D deductions as incentives, retail building owners and tenants can look at a variety of improvements to a retail facility to discover maximum benefits. According to the U.S. Department of Energy, lighting and HVAC each represent 40% of the average commercial building’s electric bill, for a total of 80% of electric costs. Energy-efficient lighting projects are estimated to generate an average 45% return on investment, according to the Energy Cost Savings Council.

I would recommend professional expertise when looking at HVAC system upgrades that will qualify for the §179D deduction. The building that is to be improved with the new HVAC system must be modeled by a qualified individual using IRS prescribed software, and blueprints/plans and specifications for the new system also need to be provided. In order for the HVAC system to qualify for the $0.60 per square foot deduction, it must save at least 16 2/3% in energy costs over the minimum requirements established by ASHRAE 90.1-2001. Based on the specific needs and characteristics of a retail property, as well as the variety of HVAC and control systems available in the marketplace today, it makes sense to model any and all possible systems to find the most cost-effective solution for the property. Once the study has been completed, third party certification is required in order for the system to qualify.

One simple improvement to the building envelope, that may — coupled with other efficiency measures — assist in qualifying for the §179D deduction, is window glazing or tinting. Low emissivity (Low-E) coating on glazing or glass windows controls heat transfer, usually resulting in a 30% to 50% reduction in energy loss. According to the U.S. Department of Energy, Low-E coatings can be applied to the outside pane of glass to reduce heat coming into the building, and applied to the inside pane of glass to help retain heat in the building in colder climates. Some Low-E coatings can be applied to existing windows as retrofits, which is a fairly inexpensive way to not only save on energy consumption, but may also, coupled with other energy efficiency measures, help in achieving the building envelope §179D deduction.

Claiming tax deductions in exchange for spending on energy efficiency improvements can make the difference in lowering your operating expenses and energy costs for years to come.

If you’ve already made energy efficient improvements to your retail facilities and have not claimed your §179D deduction, you may benefit from the recent issuance of Revenue Procedure 2011-14, which allows some taxpayers to claim this deduction all the way back to January 1, 2006 without filing one single amended income tax return. This means that you could “catch up” by potentially claiming deductions from 2006-2010 (or 2011) all on one return and significantly reducing your tax burden — if not eliminating it altogether.

Another tax strategy that retail owners should take advantage of is the §179 deduction, which allows businesses to deduct the full purchase price (within specified dollar limits) of equipment purchased or leased and put into service in 2011.

The Economic Stimulus Act of 2008 increased the §179 deduction limit to $500,000 and increased the total amount of equipment that can be purchased to $2 million from the previous amount of $200,000. A one-time Bonus Depreciation was also added, which now allows businesses to write off 100% of the purchase price of new equipment or other assets during the year they were purchased, as opposed to taking depreciation through annual deductions over time.

When originally established, Bonus Depreciation allowed 30% of the purchase price to be deducted, then 50%, and now 100%. However, this is a temporary rule change, and limits are scheduled to revert in future years. Therefore, this is a great time to take advantage of these generous allowances while they are available.

Most business equipment, software, office furniture and even some vehicles can qualify for the §179 deduction, including the following:

• Equipment or machinery purchased for business use.

• Tangible personal property used in business.

• Business vehicles with a gross vehicle weight in excess of 6,000 lbs.

• Computer software.

• Office furniture and equipment.

• Property attached to your building that is not a structural component of the building (e.g., a printing press, large manufacturing tools and equipment).

• Partial business use (equipment that is purchased for business use and personal use — generally, your deduction will be based on the percentage of time you use the equipment for business purposes).

Consider a scenario where you lease (under certain lease obligation) or finance some of the above equipment during 2011. Your business can deduct the full purchase price of that equipment in 2011, yet you’ve only made a few payments. Additionally, you have the benefit of putting the new equipment into use.

Another option that may be considered is a cost segregation analysis that identifies and reclassifies personal property assets to shorten the depreciation time for taxation purposes, which reduces current income tax obligations. Personal property assets include a building’s non-structural elements, exterior land improvements and indirect construction costs. Depreciation expense is accelerated and tax payments are decreased when an asset’s life is shortened, which frees up cash. If you purchased real estate in 2011 you may be entitled to a large bonus depreciation deduction by property identifying 5-year and 15-year assets within your property.

Taking advantage of available tax deductions could have a major effect on your bottom line. It makes sense for retail business owners to investigate their options when it comes to tax strategies for obtaining the equipment or other assets that will enhance your business, while taking advantage of generous tax deductions, improving cash flow and increasing profits.