Tax Benefits of Energy-Efficiency Measures

By:
Kimberly Giese
Published Date:
Jun 1, 2015

Energy is usually a “top five” expense item for any organization, but there are many ways to reduce the amount that an entity consumes or spends. These options are always site specific; they range from easy to complex, and the timeline and return on investment (ROI) vary by project. They can be as simple as a paper transaction with a supply agreement, where savings start after 30 days, or as complicated as a lighting upgrade, where the reduction in energy consumed begins as soon as the installation is complete but the ROI could take 0 to 18 months.

Aside from environmental responsibility, there are many benefits to reducing the amount of energy that an organization uses. It obviously has a positive impact on the bottom line: the monthly bill will be lower because half of the bill is generated based on consumption. For a building owner, it helps reduce operating expenses; moreover, other efficiency measures can have a positive impact on the value of the property. Many city and state governments have set goals to reduce carbon emissions by a varying percentage over a specific period of time. To reach their goals, they have started adding laws that building owners and operators must follow.

In New York City, for example, all buildings that are 50,000 square feet and greater have numerous local laws they must comply with. Some of the laws require buildings to change or update elements of the base building systems. These measures can further reduce the amount of energy a building consumes and also increase its value by using newer, more efficient, and compliant systems. It is important to note that fines for noncompliance are steep and compound quickly, so it is beneficial for a building to be in compliance by the deadline that the Department of Buildings has set for each one.

Tax Incentives in New York

In New York, there is a 50% sales tax rate reduction incentive for switching electric or gas supply to an energy services company (ESCO) instead of Con Edison. It is a simple paper transaction where the user signs a contract with an ESCO for a specified price or index program for a predetermined length of time. The user will still receive a monthly bill from Con Ed that includes the ESCO portion, and the sales tax rate is automatically reduced from 8.875% to 4.5%. (The sales tax rate reduction does not apply to residential units or residential buildings that do not have any commercial space because their tax rate is already 4.5%.) It is not necessary to file any paperwork or receive any approval; it is an automatic program. This switch also eliminates the line item “Merchant Function Charge” (MFC) from one’s energy bill. The MFC is nominal, but a savings nonetheless. These programs are available in every deregulated state (42 in the United States), but other states do not offer the same tax rate reduction as New York. The only benefits are reducing the price the user is paying per kilowatt hour (kWh) for electricity or thermal units (therm) for gas.

There are many grants, incentives, and rebates to help finance energy-efficiency projects. They come from various sources, including the local utility, government, and private organizations. (This state-by-state list of government programs is especially helpful.) Many can cover 50% or more of the total cost of a project. They vary by source and type of project. For example, the New York State Energy Research and Development Authority (NYSERDA) offers several benefits.

NYSERDA’s Existing Facilities Program (EFP) provides incentives for energy-saving capital projects, such as lighting upgrades, boiler upgrades, variable frequency drives, energy-management systems, and others. Program highlights include the following:

• Applicants can receive $30,000 to $2 million in incentives for qualifying projects. Projects must save enough energy to reach the $30,000 incentive minimum.

• The incentive amount is based on the amount of energy saved. For the New York City area, the incentive is $0.16 per kWh saved and $20 per MMBtu saved.

• Multiple projects can be combined into an application to meet the minimum incentive amount.

• Through a joint NYSERDA and Con Ed program—the Demand Management Program—there is additional funding available for projects that save 50 kW of demand during peak times and are implemented before summer of 2016. 

• Applications must be submitted prior to project installation.

 

It also offers rebates through its Combined Heat and Power (CHP) Acceleration Program. Key program details are as follows:

• NYSERDA offers incentives for preapproved CHP systems installed by program vendors.

• Sites must pay into either the electric or natural gas system benefit charge (SBC).

• Funds are allocated on a site-by-site basis, first-come, first-served.

• The incentives range from $1,200/kW to $1,800/kW, depending upon the system selected, and typically cover 30% to 50% of project costs

• The maximum incentive per project, including bonuses, is $1.5 million.

• Eligible systems and incentives are listed in the program catalog.

• The maximum CHP system size is 1.3 megawatts; there is another program available for larger systems.

More information about these programs can be found on the NYSERDA website. In addition, Con Edison offers a variety of programs: prescriptive rebates, performance-based incentives, technical studies, and enhanced incentives. There are many options for tax-exempt organizations as well. Lastly, depreciation is another topic that should not be overlooked (see a brief overview on this subject for more information).

The CPA’s Role

Every business is affected by energy. No company is immune from the combination of rising energy costs and environmental responsibilities, as well the impact of increasing regulatory compliance; thus, this is an important area that must not be overlooked. With a little research and knowledge, CPAs can help their clients or partners save money and have a positive impact on the environment, which benefits all for many years. The following are three ways CPAs can help:

  • Ask clients if they are currently using a supplier other than the local utility for electric or gas. Inform them that they have options to receive a reduced rate from an ESCO and mention the tax savings in New York if applicable. Most local utilities have options online to review different providers and switch. 
  • Ask if they have upgraded their lighting in the last five years. If not, mention that it is a very quick and easy way to reduce consumption up to 40%. Note that there are rebate and incentives that vary by state, but can fund 50% to 100% of the cost of the project.
  • Ask if they are currently working on or considering any other efficiency measures like solar or cogen. Inform them of the financing options and the various tax benefits available.


Kimberly Giese works at Reflective Energy Solutions as a business development/management professional with experience in energy, technology, healthcare, transportation, and imports. She is an energy consultant with experience in every deregulated market in the U.S. in electric and gas supply, cogeneration installation or optimization, lighting upgrades, solar installation, oil to gas conversions, #6 oil conversions to #4 or #2, and local law compliance for New York City. She can be reached at kimberlyg@reflectivees.com or 201-880-1997.

 
Views expressed in articles published in Tax Stringer are the authors' only and are not to be attributed to the publication, its editors, the NYSSCPA or FAE, or their directors, officers, or employees, unless expressly so stated. Articles contain information believed by the authors to be accurate, but the publisher, editors and authors are not engaged in redering legal, accounting or other professional services. If specific professional advice or assistance is required, the services of a competent professional should be sought.