The letter from Roundtable President and CEO Jeffrey D. DeBoer was sent to House Ways & Means Committee Chairman Dave Camp, R-Mich., and Ranking Member Sander Levin, D-Mich. — as well as the co-chairs of the tax reform working group on energy, Reps. Kevin Brady, R-Texas, and Mike Thompson, D-Ga.
The Section 179D deduction was first enacted in 2005. Since then, it has proven cumbersome and unworkable for many building owners and managers, particularly with regard to complex, multi-use assets, noted The Real Estate Roundtable. It is also largely unavailable to real estate investment trusts (REITs) and other real estate holding structures with pass-through characteristics. As a result, the deduction is generally only used in connection with limited lighting-system retrofits — failing to live up to its potential for encouraging whole-building retrofits of multiple systems, including HVAC and building envelopes.
Bipartisan senate legislation introduced this past September (S. 3591) — with widespread support from real estate, industry, manufacturing, and contracting stakeholders — would address these shortcomings and extend the provision beyond 2013. A University of Massachusetts analysis released by The Roundtable, U.S. Green Building Council, and Natural Resources Defense Council in 2011 concluded that more than 77,000 construction, manufacturing, and service jobs would be created by a reformed Section 179D tax deduction. (Report available online at www.rer.org/PERI-Analysis.aspx.)
Citing energy efficiency as the lowest-cost resource for boosting U.S. energy independence and security, DeBoer stated, “While we are in favor of an ‘all of the above’ energy policy, it warrants emphasis that incentives which focus on saving energy as opposed to producing energy get more ‘bang for the buck’ — particularly given limited federal resources.” He added, “It costs less to save a kilowatt of energy than to create a new one (whether through fossil fuel or renewable technologies). For this reason alone, 179D must be at the fore when crafting sound policy in the energy tax incentives arena.”
DeBoer urged Congress to focus on incentives for retrofitting existing buildings, since nearly 75 percent of the nation’s building stock is more than 20 years old and ripe for energy upgrades. He also drew distinctions between tax “deductions like 179D — which allow businesses to expense capital improvements as part of their ordinary operating costs” and tax credits, “which may function more like subsidies that finance energy creation.” In addition, DeBoer emphasized that energy incentives must be “performance-based” (thereby, rewarding building retrofit projects that achieve “actual and verifiable energy savings”); and “technology-neutral” (supporting “projects, not products”).
Another important means of encouraging energy retrofits is an existing tax provision that allows building owners to depreciate leasehold (tenant) improvement costs over 15 years — instead of having to capitalize such costs over a much longer period of 39 years. With this provision expiring at year-end, The Roundtable urges lawmakers to act now to make it a permanent part of the tax code.
“Allowing 15-year depreciation to revert to 39 years would result in higher capital costs for tenant improvements, creating a disincentive for building owners to upgrade, modernize, and make spaces more energy efficient for their tenants,” DeBoer explained.
For more information, visit www.rer.org.
Publication date: 4/8/2013