Energy storage helps qualify building owners/tenants and designers for tax deduction
May 9, 2016
It's that time of year again—tax season. Business owners are investigating all the ways to save money and are relying on CPAs and other financial advisors to navigate the ever changing tax codes. Some common ways businesses can save money are through deductible business expenses including travel, meal and vehicle expenses. There are also deductions for capital assets or equipment expected to last longer than a year, especially if that equipment helps the environment. The Energy Policy Act Code Sec.179D tax deduction (EPAct) in particular rewards investments in energy storage equipment.
The goal of the EPAct tax deduction is to incentivize building owners, tenants and the design community to achieve fixed energy efficient targets, according to Raymond Kumar, senior account manager with Energy Tax Savers.
What is EPAct and who benefits
Energy production including energy efficiency and renewable energy is addressed in the EPAct law. Under this U.S. law, the EPAct 179D incentive provides a $0.30 to $1.80 per square foot tax deduction for energy efficient equipment relating to the bill - lighting, HVAC and the building envelope system, such as walls and insulation.
Qualifications are based on the ASHRAE (American Society of Heating, Refrigerating, and Air-Conditioning Engineers) standards. Building projects completed between 2006 and 2015 will use ASHRAE 90.1-2001 standards, while projects completed beyond 2015 will use the ASHRAE 90.1-2007 standards. For designers of government buildings, the system must have been installed in the last 3 years. For the designers' firm or building owner/tenant to qualify for the full $1.80 per square foot the building needs to be 50 percent more energy efficient than ASHRAE standards. The qualifying equipment must reduce the building's energy costs by a prescribed amount as compared to a building designed to meet ASHRAE 90.1.
There are two types of beneficiaries of the EPAct 179D incentive:
- Commercial building owners and tenants that want to install energy efficient equipment.
- Designers of government buildings, which covers architects, engineers, ESCOs and energy consultants, among others.
A tax deduction for energy storage
What makes this EPAct tax deduction so advantageous for buildings with energy storage is that a thermal energy storage system alone is often enough to qualify for tax deduction levels. If a building owner/tenant already has a thermal energy storage system installed prior to 2006, simply adding energy efficient lighting/HVAC controls can also help the building qualify.
Take for example, a qualified CALMAC IceBank energy storage system installation in a 100,000 square foot building, assuming a 35% tax rate, and given the rule that you need 1 ton of peak cooling load for every 400 square feet, the EPAct deduction is equivalent to a rebate of $210/ton to $630/ton. Of course, the EPAct is not a rebate since it's a tax deduction but in a sense, it's like a rebate for thermal energy storage. As such, a 200,000 square foot building could net $360,000 in deductions, according to Kumar.
In fact, some companies have received as much as $7 million in reductions by meeting the EPAct standards, according to Charlie Goulding, president and founder of Energy Tax Savers.
"If it's a smaller building there's going to be a smaller tax deduction and tax benefit, if it's a bigger building there's going to be a larger tax deduction and benefit," Kumar said. "It works best with larger buildings [or building complexes]."
Factors which influence the tax deduction amount for a thermal energy storage system include the amount of demand charges, time of use pricing and the amount of cooling load. Thermal energy storage cuts down on the high cost of energy by taking advantage of the low utility rates provided by companies at night, as opposed to the high rates during day-time peak hours.
"Thermal storage is like a giant refrigerator that makes ice. What you want to do is make ice at night when electricity is less expensive," Goulding said. "You cool the building down during the hot day when electricity is very expensive, because commercial companies pay markedly different rates depending on the time of day.
Example of EPAct in action
"[EPAct is great for] designers that haven't had as much experience using something that's very efficient like a CALMAC system," Goulding said. "The law encourages him or her to give more consideration to a very energy efficient system like CALMAC because they're going to get an energy incentive."
"Morgan Stanley reduced electric use by 900,000 kw/h."
Morgan Stanley, a highly reputable financial firm, installed a CALMAC thermal energy storage system in its Purchase, New York, facility, according to a company press release and received a six-figure EPAct deduction.
"Aging equipment and the need for additional cooling capacity and site resiliency motivated us to investigate environmentally responsible solutions," said James P. McAleer, vice president of facilities for Morgan Stanley. "In addition to being recognized by NYSERDA and Westchester County, the Purchase site will be a beta for similar projects at Morgan Stanley facilities around the globe."
The thermal energy system installed reduced peak energy usage by 740 kilowatts, overall electric use by 900,000 kW/h and site fuel consumption fell 15,000 MMBTu. The impact Morgan Stanley had on the environment by limiting carbon emissions was similar to taking 270 cars off of the road.
In short, thermal energy storage is a great opportunity for designers and building owners to achieve large levels of EPAct tax deductions. As taxes are considered for this year and next, any current and potential energy storage customers should contact an EPAct tax advisor to review for eligibility.
