Tax Savings Under The New Energy And Transportation Laws
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Tax Savings Under The New Energy And Transportation Laws

No, neither the price of gasoline nor its impact on your multi-unit, multi-brand franchise business will be reduced under of the recently passed energy and transportation bills. However, both the Energy Tax Incentives Act of 2005, and the Safe, Accountable, Flexible Efficient Transportation Equity Act of 2005, could have a noticeable impact on the tax bills of every franchised business - as well as those of their owners and operators.

It is no secret that these bills were designed to boost conservation efforts, increase domestic energy production and fund improvements to the country's transportation infrastructure. Tucked away in the provisions of these new laws, however, are new tax incentives that have been added for the purchase and installation of so-called "solar energy property." What's more, those who use vehicles in their business operations may be able to take advantage of the revised credits available for either the purchase or lease of hybrid and other types of alternative fuel vehicles.

For those owners and operators involved in residential construction, an innovative new provision for builders of energy-efficient homes, including those producing manufactured houses, offers a $1,000 or $2,000 tax credit. Commercial building owners could benefit from provisions in the new law that will reward them for energy-efficient expenditures on their properties.

According to our lawmakers, approximately nine out of ten commercial buildings were built more than 15 years ago. Not too surprisingly, only a small percentage of those buildings have been updated to meet current energy standards. After all, until now, there was no significant federal tax incentive to encourage the use of energy-efficient property, systems or equipment.

The Energy Act, however, contains a unique new tax deduction for energy-efficient commercial building property. That means an immediate write-off for a portion of the cost of "property" acquired to make the building housing the multi-unit franchise operation more energy-efficient. The balance of those expenditures, exceeding the performance-based caps can be depreciated or written off as capital assets.

After December 31, 2005 and before January 1, 2008, every owner and operator may claim a deduction for costs associated with energy-efficient commercial building property. That "energy-efficient commercial building property" involves property, systems or equipment installed as part of interior lighting systems, the heating, cooling, ventilation and hot water systems, or the building's envelope.

Although the tax law does not define "building envelope," the U.S. Department of Energy defines the term as including: "everything that separates the interior of the building from the outdoor environment, including the windows, walls, foundation, basement slab, ceilings, roof systems and insulation.

Because this deduction is performance-based rather than based on the cost of the equipment, systems, or property, the Energy Act placed a cap on the amount that may be deducted of $1.80 per square foot of the building. Thus, a franchised business that spends $5,000 to acquire a lighting system that qualifies their 2,000 square foot building for this unique write-off may claim an immediate tax deduction of $3,600 ($1.80 x 2,000 square feet). The balance, $1,400, is depreciable.

In order to qualify as a 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 the owner or operator obtain certification of a plan to reduce the overall energy and power costs in connection with the installation of the property. While the IRS has been tasked with designing and governing this certification process, Congress has mandated a few procedural guidelines - and loopholes.

Under one of those loopholes, 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.

Any owner or operator who replaces any of these systems in an existing building and meets the designated target 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.

The Energy Act increased the business investment credit for solar energy property from its current level of 10 percent to 30 percent. That increased 30-percent credit 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 (1) equipment which uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat and (2) equipment which uses solar energy to illuminate the inside of a structure, using fiber-optic distributed sunlight, effective for periods ending before January 1, 2008.

And, don't forget, many states provide energy incentives through personal and corporate income tax credits.

Many multi-unit or multi-brand franchise businesses use vehicles in their operations or provide them to their sales force, owners or key employees. Very few, however, have taken advantage of a unique tax deduction for fuel-saving vehicles. The new tax rules may change that situation.

The existing tax deduction for so-called "clean fuel" vehicles ends on December 31, 2005, to be replaced by a series of credits for hybrid, lean-burn vehicles, fuel cell vehicles and alternative fuel vehicles under the overall title of the "Alternative Motor Vehicle Credit." Best of all, the new credit is available to both purchasers and lessors of hybrids and lean-burn vehicles.

The owners or managers of many franchised businesses will be happy to note that the credit is available to lessors and is not only available for passenger cars but, also potentially, for both light and heavy trucks. The credit for heavy trucks expires December 31, 2007, one year earlier than for hybrid cars, light trucks and other lean burn vehicles.

The new, two-part credit consists of (1) a fuel economy credit and (2) conservation credits. The fuel economy credit is computed on the basis of a comparison with 2002 model year fuel economy for city driving. This portion of the credit ranges from $400 for a vehicle with fuel economy that is at least 125 percent better than the base amount and up to $2,400 for one that has fuel economy of at least 250 percent of the base amount.

To illustrate, a 2002 passenger car in the 3,500-pound class had a fuel economy rating of 22.6 miles per gallon. Accordingly, a hybrid vehicle that produces fuel economy of double that amount would be entitled to a $1,600 fuel economy credit under the new law. The conservation credit relates to the lifetime fuel savings of a vehicle and ranges from $250 for a savings of at least 1,200 gallons of gasoline to $1,000 for a savings of at least 3,000 gallons.

These figures, thankfully, will be computed by the IRS for each hybrid vehicle that qualifies.

For those owners or operators with vehicle fleets or who want to really get involved with environmentally friendly vehicles, a new credit of $30,000 is available for the commercial installation of alternative vehicle refueling property. That property includes storage tanks and dispensing units as well as charging stations for electric cars.

Alternative fuels for purposes of this credit include mixtures that are at least 85 percent ethanol, natural gas, compressed natural gas, liquefied natural gas or petroleum gas or hydrogen, as well as biodiesel/diesel mixtures of at least 20 percent biodiesel.

Four years in the making, Congress finally passed major energy legislation designed to shore up the nation's energy infrastructure and provide for future energy needs. The tax portion of that legislation provides $14.5 billion over a ten-year period to boost conservation efforts, increase domestic energy production and expand the use of alternative energy sources.

Beneficiaries of Congress's largesse were primarily oil, gas and renewable energy companies, manufacturers of household appliances and homeowners who make energy efficient improvements to their principal residences. However, many owners and operators will also benefit. Guidelines should be forthcoming from the Internal Revenue Service as many of these tax-saving provisions take effect after December 31, 2005.

Published: May 15th, 2006

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Multi-Unit Franchisee Magazine: Issue 4, 2005
Multi-Unit Franchisee Magazine: Issue 4, 2005

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