The Energy Policy Act of 2005: Tax Deduction vs. Tax Credit

Posted by Jimmy Hovey on Thu, Jan 26, 2012 @ 07:01 AM

All Business Owners Like A Tax Deduction...Right?

Energy-Policy-Act-Of-2005-epact

Let's Look At The Energy and Policy Act of 2005 (EPAct)....

The Energy and Policy Act of 2005 was originally put into place in 2005 by President Bush as an incentive to get businesses to invest in energy upgrades to slow down the continual increase in demand on the country’s aging electrical grid infrastructure. 

The Act was renewed in 2009 by President Obama through the Economic Stimulus Act which extends the program until 2013. 

Who Knows About EPAct?

There seems to be very little knowledge of the system throughout industry. I have spoken to many Accountants and have received that blank stare back at me.  You may have to do the research and inform your Accountant of the benefits. 

Once they are aware of how it works, they should be able to advise you how it will impact your energy efficiency project. 

It Is A Tax Deduction, Not A Tax Credit

The core feature of the act is the ability of an owner to take advantage of a tax deduction. This is not a tax credit, it is actually a deduction.  Similar to accelerated depreciation, it allows the building owner to take deduct the portion of the project that qualifies under EPAct rules. 

The main functions of The Energy Policy Act of 2005 are:

  • Allows a building owner to take a straight tax deduction of $1.80 per square foot on your facility. 

  • The deduction is divided into three areas; Electrical, HVAC and the Building envelope. 

  • Each of the areas qualifies for a $.60 per square foot deduction if area that has been upgraded is at least 50% below the ASHRE standard for wattage per square foot. 

  • There is a sliding scale beginning at 25% of the ASHRE standard for electrical upgrades which may qualify the facility for even a partial deduction.

After identifying the systems within your facility, we are then able to determine the potential tax deduction benefit from an energy system upgrade. This requires identifying what you currently have in place and designing the new system to see what your new system wattage will be after the potential upgrade. 

If the upgrade is electrical, we will determine the square footage of the area to be upgraded and calculate the square footage by $.60 per square foot.

Here Is An Example-

100,000 square foot facility Qualifies for EPAct.

The facilities Tax Deduction would be $60,000 that could be written off in the year of the improvement.

(100,000 square feet x $.60 per square foot = $60,000.)

Let's Compare EPAct To Typical Depreciation

Let's say it cost $100,000 to upgrade your facility.  We will also assume the entire facility qualifies under EPAct.  We will use the $60,000 number from above to show the comparison of normal depreciation vs the depreciation allowed under EPAct. 

Under EPAct

You would be able to deduct $60,000 in the year that the improvement was made. So if you made the improvement in 2010, you would be able to deduct $60,000 of your cost on your 2010 taxes. 

Comparing EPAct to normal depreciation

You would likely only be able to deduct $10,000 per year for 10 years (assuming 10 years is the allowable depreciation...I am not an Accountant so just realize this is just an example).  In this scenario, the tax benefit to you would be $50,000.  BUT, this really only means anything if you have a profitable year. 

Your Building May Not Qualify

We have had buildings that qualify in the shops and work areas, but do not qualify in the office areas. The problem is that offices have been overlit for a long time, so even when you reduce the wattage, it is still too much wattage per square foot to qualify. If it doesn't qualify, be sure to ask your provider if it falls under the sliding scale.  

If the building does not qualify for the full potential tax savings, there is a sliding scale starting with a 25% tax deduction depending on the facility. 

A Bit Overwhelming?

It may still seem confusing, but we can help you determine if your facilty qualifies or not.  EPAct is just one of the many benefits of upgrading your facility.  Check out the other benefits in our E-Book, Business Owners Guide To Energy Efficiency.  We discuss in more detail the valuable benefits of energy efficiency. 

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Topics: epact tax deduction, epact lighting