United Financial Solutions
Energy and R&D Tax Credits
About EPAct 179D
On August 8th, the Energy Policy Act of 2005 (EPAct) was enacted creating immediate potential tax savings for building owners or architects and engineers based on the use of energy efficient improvements. Section 179D outlines the requirements for a maximum potential tax deduction of up to $1.80 per square foot of affected spaces. In 2008, The Emergency Economic Stabilization Act extended the deduction period through December 31, 2013. The Protecting Americans from Tax Hikes Act of 2015 extends 179D through December 31, 2016.
Qualifications for EPAct 179D
Qualifying improvements must reduce the building’s energy use in at least one of three categories, lighting, HVAC, or building envelope to receive at least a partial deduction. The improvements must achieve a specified percentage reduction in energy usage compared to ASHRAE 90.1-2001 reference building code standards through 2015 and ASHRAE 90.1 2007 for 2016. Additionally the project must be certified by a properly licensed engineer or contractor upon completion.
The Benefits of EPAct 179D
The maximum deduction of $1.80/sq ft. is comprised of three partial deductions: up to $.60/sq ft. for lighting, HVAC, or building envelope each.
Candidates for EPAct 179D
Ideal candidates for EPAct deductions are newly constructed buildings with at least 50,000 sq ft., renovation projects (particularly lighting retrofits), and regional or national chains that feature multiple locations.
In general, the commercial building owners are entitled to these one-time tax deductions, however, in the case of non-taxpaying building owners such as government building, EPAct allows the primary designer (architect/engineer/contractor) to obtain the tax incentives.
The Process for qualifying for EPAct 179D
The process of qualifying projects for the EPAct Section 179D deductions requires a detailed engineering analysis of building energy usage. For lighting projects our interdisciplinary tax experts and engineers can utilize architectural drawings and power plans to perform energy reduction and lighting density calculations. HVAC and building envelope projects, however, are generally more difficult as they require in-depth energy modeling.
R&D Tax Credit Basics
Since its adoption in 1981, the R&D (formally, the Research & Experimentation) Tax Credit has been one of the most significant resources used by companies, in a wide range of different industries, to maximize their bottom line. Initially designed to promote domestic innovation and R&D investment, the credit has evolved constantly during its lifetime. According to the advocacy group, the R&D Credit Coalition, only 17,700 public and private companies have claimed this dollar-for-dollar credit totaling $6.6 billion dollars. The large majority (over 65%), of eligible companies overlook or fail to take full advantage of this tremendous opportunity.
The Research and Development (R&D) Tax Credit is one of the most substantial incentives under current U.S. tax law because, unlike a standard deduction, it is a dollar-for-dollar credit against your tax liability. Depending on your company’s qualified research expenses, the credit can include eligible wages, supplies, and outside contractor expenses. Also, this federal tax incentive is available in over 30 states. Lastly, the R&D Tax Credit is available for all open tax returns, which usually includes up to 3 previous years and the current tax year. In the case of insufficient lax liability, firms may have the option to carry the credit forward 20 years.
The common misconception about the Research and Development (R&D) Tax Credit is solely for traditional white lab-coat activities and manufacturers. Recent legislation has broadened the industries and companies that qualify for the credit. Common R&D eligible activities include:
- Pre-production design & engineering of a new product or improved existing product
- New process or production improvements
- Prototyping and patent applications
- Experimenting or testing new concepts, formulations, materials, tools, and procedures
- Software development for internal use or sale
- General trial and error experimentation
The essential criteria for Qualified Research Expenses are summarized in the Four Part Test:
Elimination of Uncertainty
- Expenditures represent research and development costs in the experimental or laboratory sense if they are for activities intended to discover information that would eliminate uncertainty concerning the development or improvement of a product.
- Uncertainty exists if the information available to the taxpayer does not establish the capability or method for developing or improving the product or the appropriate design of the product.
- In order to satisfy the technological in nature requirement for qualified research, the process of experimentation used to discover information must fundamentally rely on principles or existing technologies of the physical or biological sciences, engineering, or computer science.
- There is no “discovery” requirement, which abandons the requirement that the research activities be undertaken to obtain knowledge that exceeds, expands or refines the common knowledge of skilled professionals in a particular field of science or engineering.
- The taxpayer must intend to apply the information being discovered to develop a new or improved business component of the taxpayer.
- A business component is any product, process, computer software, technique, formula, or invention, which is to be held for sale, lease, or used in a trade or business of the taxpayer.
- A taxpayer must be able to tie the research it is claiming for the credit to the relevant business component.
- A process of experimentation is a process designed to evaluate one or more alternatives to achieve a result where the capability or the method of achieving that result, or the appropriate design of that result, is uncertain as of the beginning of the taxpayer’s research activities.
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