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The Shock of a Lifetime
(A/K/A - Your Electric Bill)

General Business News

December 2005

The Shock of a Lifetime
(A/K/A - Your Electric Bill)

Okay, so the title of this month’s article is a little trite, but chances are your electric bill has been rather high this year. At the time this article as written, oil prices had subsided a little, but the fact is, energy costs have soared over the past year, and it’s not your local utility company that’s footing the bill.

So, tell me something new, you may be thinking. While the size of your electricity bill isn’t news, there are some things you can do to moderate your costs a little. In addition, federal and state governments are also pitching in to help with electricity costs – sort of.

Help from the Federal Government

On August 8, 2005, the President signed into law the Energy Policy Act of 2005 (EPA), which contained various provisions designed to encourage energy conservation on the one hand, and encourage exploration and development of current energy sources, along with development of alternative renewable energy sources. This article will deal only with those incentives that help reduce electrical costs.

Solar Energy

There are two methods of using the sun as a renewable source of energy: Solar Photovoltaic and Hot Water Systems. Solar Photovoltaic systems convert energy from the sun into electricity. This, in turn, reduces the electricity you must buy from the local power company. Hot Water Systems are used to lower costs by replacing a portion of the water heated by electricity with solar heated hot water. While saving money on hot water may seem petty, hot water systems are also used in space heating. In large commercial buildings, space heating is a significant cost.

To encourage investment in solar energy, the EPA provides a tax credit equal to 30% of the cost of solar systems placed into service in 2006 and 2007. There are, of course, various limitations and requirements on what expenditures qualify for the credit. There is no dollar limitation on the amount of the credit, but other tax code provisions can limit the amount of the credit that can be used in a given year.

The credits provided under the EPA are helpful in financing a solar system, but bear in mind the costs can be quite high. To encourage the deployment of solar systems, many states have financial incentive programs that can include credits as well as low-interest loans.

Commercial Buildings

The EPA provides a tax deduction of up to $1.80 per square foot for commercial buildings that achieve a 50% reduction in yearly energy costs to the user. The standard against which the reduction is measured is the industry standard ASHRAE/IESNA 90.1-2001. Energy usage and costs relate only to heating, cooling, lighting and water heating as these are the only items measured by the ASHRAE standard that are within the control of the building designer. The deduction is allocated 1/3 each to the envelope (insulation, external walls, etc.), the heating, cooling and water heating systems, and the lighting systems, provided they meet their individual share of whole-building savings.

Eligible property includes offices, retail structures, warehouses, rental housing of four stories or more and publicly-owned buildings. New building construction is eligible for the full deduction while new construction in an existing structure will qualify for 1/3 of the otherwise allowable deduction.

This deduction is available for property placed in service in 2006 and 2007, but there is a possibility of extending the deduction through 2009 or 2010 based on comments by Senate Finance Committee Chairman Grassley.

Fuel Cells and Microturbines

The EPA provides a tax credit of 30% of the cost of fuel cells used in business. The maximum credit is $500 per 500 watts of capacity with a generation efficiency of 30% or more.

Microturbines of 2,000 kilowatt capacity or less and an efficiency of 26% at International Standards Organization conditions qualify for a 10% tax credit. The credit cannot exceed $200/kilowatt.

As with other provisions in the EPA, the credit applies to equipment placed in service during 2006-2007.

State Government Incentives

Many states have also enacted laws that provide tax incentives for investment in renewable sources of energy. For detailed information, go to The Database of State Incentives for Renewable Energy (DSIRE).

Proactive Energy Conservation

As part of any decision regarding investment in new equipment, of prime concern will be your present electricity usage and ways in which that consumption can be reduced. To do this, you need to conduct an Energy Audit. An Energy Audit is basically an assessment of where you utilize electricity and how efficient that use is. It can take the form of a simple walk-through of your facilities to identify major areas of concern, or more detailed studies can be performed. You can elect to perform the audit using your own personnel or you can engage outside experts. The amount of your electric bill and complexity of your facilities will dictate the need for retaining outside experts.

Other Considerations

At first glance, the tax incentives provided by the EPA of 2005 seem to be somewhat generous; however, this may not be true when you compare what you pay to get the tax benefits. For example, microturbine costs run anywhere from $700/kilowatt to $1,100/kilowatt to install with operating and maintenance costs of $.005 - $.016. While depreciation allowances will allow a business to recover the cost of the system over time, the initial cost of the capital investment can range anywhere from $630/kilowatt to $990/kilowatt after accounting for the investment credit.

What the small business owner will have to do is balance the positive effects on the environment and reduced electrical costs against the required investment. For some, the answer will be to expend the funds necessary to install required equipment. For others, equipment costs will not justify taking advantage of these tax incentives. The choice can be difficult, but should always be made based on all the facts. If you are considering changing the power sources at your place of business, give us a call. Let us help you run the numbers to determine what your best course of action will be.

Happy Holidays to all and may you have a prosperous New Year.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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