Save energy; reduce your taxes
By Mark E. Battersby

Studies show that 75 percent of the energy for commercial buildings is electric, and 65 percent of the use is HVAC-driven. On average, $2 per square foot is spent for electricity costs, ranking it among the top three operating expenses.

Many chiropractic practices throughout the nation operate in older buildings with leaky windows, poor insulation, and patched roofs. Despite escalating energy costs, few chiropractors are aware of the many incentives — both cash and tax incentives — available to help reduce that major operating expense.

On August 8, 2005, President George W. Bush signed into law, H.R. 6, the Energy Policy Act of 2005. Only recently, however, has the Internal Revenue Service provided guidelines for commercial building owners and tenants to qualify for a unique tax deduction for making their buildings energy efficient.

The tax provisions of the Energy Policy Act set a precedent because, for the first time, legislation contained a market transformation incentive in the form of a tax deduction for owner improvements in commercial building efficiency. In other words, the actual amount of the tax deduction is based on how energy-efficient a commercial building is made, not on how it is spent on equipment and other "property" necessary to reach that goal.

PERFORMANCE CAPS

Generally, under this law, which became effective January 1, 2006 (and which expires after 2008), if you upgrade energy systems (such as heating and cooling) in your practice, you can file for tax credits and deductions that could save you tens of thousands of dollars, even though the Energy Act placed a ceiling or "cap" of $1.80 per square foot of the building on the amount that may be deducted.

Thus, if you spend $5,000 to acquire a lighting system for your 2,000 square foot building, you can claim an immediate tax deduction of $3,600 ($1.80 x 2,000 square feet). The balance of $1,400 is depreciable. You can save even more if you use government-specified building materials and stock buildings or other property with energy efficient appliances.

The instant tax write-off is already proving to be a boon to building owners who, until now, have had to write off building improvements by depreciating them over 39 years.

WHAT QUALIFIES?

The IRS's guidelines define energy-efficiency commercial building property as property that is:

1. Installed on or in any building located in the United States that falls within the scope of energy standards established by either the American Society of Heating, Refrigeration and Air Conditioning Engineers, or the Illuminating Engineering Society of North America;

2. Installed as part of (a.) the interior lighting system, (b.) the heating, cooling, ventilation, and hot water systems, or (c.) the building envelope; and

3. Certified as being installed as part of a plan designed to reduce the total annual energy and power costs of interior lighting systems, heating, cooling, ventilation, and hot water systems of the building by 50 percent or more, when compared to a reference building, which meets the standards established by the industry in 2003.

PLANNING YOUR SAVINGS

In order to qualify for an immediate tax deduction, rather than as a capital expenditure, the energy-efficient property must be installed as part of a plan intended to reduce the total annual energy and power costs of the building by 50 percent or more.

Actually, the 50 percent reduction is somewhat misleading. The rule requires that costs must be reduced "by 50 percent or more in comparison to a reference building which meets the minimum requirements of Standard 90.1-2001." Standard 90.1-2001, is a publication of the American Society of Heating, Refrigeration and Air Conditioning Engineers, and the Illuminating Engineering Society of North America.

Further complicating matters, the definition of energy-efficient commercial building property requires that your practice get certification for the plan to reduce your building's overall energy and power costs.

While the IRS has been tasked with designing and governing this certification process, the U.S. Department of Energy has created, and is maintaining, a public list of software that must be used to calculate energy savings for purposes of providing the required certification.

PARTIAL SAVINGS

Under a loophole in the new rules, a reduced deduction may be available for a building even if the reduced energy-efficient property was not installed as part of a certified plan to reduce overall energy and power costs.

The IRS will issue rules containing specific energy-efficient targets and methods of calculating such targets, for each of the separate systems, namely, interior lighting, heating, cooling, ventilation, and hot water.

If your practice replaces any of these systems in an existing building and meets the designated target, it will be eligible for a partial deduction. The partial deduction is available for the costs of energy-efficient systems installed up to $0.60 per square foot of the building.

Generally, the deduction reduces the depreciable basis of the building.

When it comes to early disposition or abandonment of the equipment or property, the commercial building energy saving write-off is treated as a depreciation deduction for Section 1245 recapture purposes. In other words, the write-off must be repaid if disposed of during the recapture period.

GOING SOLAR

The Energy Act also increased the business investment credit for solar energy property from its current level of 10 percent to 30 percent. That increased 30 percent credit only applies, however, to solar energy property, hybrid solar lighting systems, and qualified fuel cell property. Any other energy property, the credit percentage remains at only 10 percent.

The increased tax credit applies to equipment that uses solar energy to generate electricity, to heat or cool a structure, or to provide solar process heat and equipment that uses solar energy to illuminate the inside of a structure, using fiber-optic distributed sunlight, effective for periods ending before January 1, 2008.

Provisions of the Energy Act are available to help every commercial building owner or tenant reduce both taxes and energy costs. Could your chiropractic practice benefit from these savings?

Mark E. Battersby is a tax and financial advisor, freelance writer, lecturer, and author with offices in suburban Philadelphia. He can be contacted at 610-789-2480.

Disclaimer: The author is not engaged in rendering tax, legal, or accounting advice. Please consult your professional advisor about issues related to your practice.