Roundtable Weekly

This week’s Real Estate Roundtable discusses:

    New IRS Guidance and Upcoming DOE Modeling Tool May Ease Real Estate’s Use of Section 179D Tax Deduction for Energy Efficiency; Real Estate Roundtable Continues to Press for Legislative Changes
    Roundtable, Coalition Partners Urge Broader Business Input on PCAOB Initiatives, Including Mandatory Audit Firm Rotation 


New IRS Guidance and Upcoming DOE Modeling Tool May Ease Real Estate’s Use of Section 179D Tax Deduction for Energy Efficiency; Real Estate Roundtable Continues to Press for Legislative Changes  

The Internal Revenue Service last week released a notice that seeks to make it easier for commercial building owners and managers to qualify for a partial tax deduction for energy efficiency upgrades (under Section 179D of the tax code). Under the new guidance, upgrades to a building’s HVAC (hot water, heating, ventilation, and air conditioning) and hot water systems will be eligible for a $0.60 per sq. ft tax deduction if they improve energy efficiency by 15 percent over the so-called “ASHRAE 90.1 standard” from 2001. Previously, such improvements had to hit a 20 percent target over the 2001 ASHRAE standard.

2011_09_07_image_POTUS letter jobs  

September 7, 2011 Roundtable letter to President Obama outlining policy steps that could be taken to boost job creation, including encouragement of retrofits.

The Feb. 23 IRS notice does not change the existing 10 percent energy improvement target that must be met to claim a partial deduction for “envelope system” improvements; however, it raises the threshold at which interior lighting system upgrades are eligible for the partial tax deduction (from 20 percent to 25 percent).

Enacted as part of the Energy Policy Act of 2005, Section 179D provides a maximum tax deduction of $1.80 per square foot to commercial building owners that install energy efficient interior lighting, HVAC and hot water systems, as well as upgrades that improve the efficiency of the building envelope. To qualify for the maximum deduction, the equipment must be certified as part of an overall building’s design to reduce energy consumption by 50 percent above the baseline of an ASHRAE 90.1 (2001) “reference building.” If a retrofit does not move an entire building to the level of “50% over ASHRAE,” Section 179D allows for a lesser “partial allowance” in the amount of $0.60 per sq. ft. (for specific building components that meet “system targets” for improved energy efficiency). 

  IRS information 
 White House fact sheet addressing new IRS Notice and other energy issues 

The Roundtable — along with such groups as the U.S. Green Building Council (USGBC) and Natural Resources Defense Council (NRDC) — has been working with the Obama Administration and key lawmakers to improve the usability of Section 179D, which the Administration itself has labeled as “underperforming.” In a memo to the Administration last January, the three groups and Johnson Controls Corp. outlined administrative actions that could be taken “under existing authority” to increase the commercial real estate industry’s usage of the tax deduction — particularly with respect to existing buildings, which represent the majority of buildings in place today and many of which are ripe for energy efficiency upgrades. 


  Retrofit briefing panel for Senate staff: left to right
Kyle Pitsor – Vice President for Government Relations, National Electrical Manufacturers Association; Brad Molotsky – General Counsel & Secretary, Brandywine Realty Trust; Duane Desiderio – Vice President & Counsel, The Real Estate Roundtable; Tony Malkin – President, Malkin Holdings; and Lane Burt – Technical Policy Director, US Green Building Council 

Roundtable President and CEO Jeff DeBoer noted some of the problems with Section 179D in a letter to President Obama this past September, noting, for example, that the IRS still needs to develop a tax form allowing building owners to claim the 179D deduction. “The maximum effect of the existing tax deduction will not be felt unless this simple administrative step is taken,” DeBoer stated.  

Also this past September, Sustainability Policy Advisory Committee (SPAC) Chairman Anthony E. Malkin (Malkin Holdings) and SPAC Vice Chairman Brad Molotsky (Brandywine Realty Trust) briefed Senate staff members on their companies’ experiences with energy efficiency retrofits and how tax code Section 179D could be improved.

Malkin explained that even the landmark retrofit of the Empire State building (which is contracted to cut energy use by 38 percent and save up to $4.4 million in annual energy costs) has been unable to benefit from the Section 179D tax deduction. Molotsky focused on the tax deduction’s use of ASHRAE baselines (which are designed for new buildings) and the inability of REITs (real estate investment trusts), limited liability partnerships and other corporate structures to claim the tax deduction.

Although administrative steps such as the one announced last week by the IRS are helpful with regard to the Section 179D tax deduction, there are some reforms that can only be accomplished through legislation, such as:  

moving away from the “over ASHRAE” baseline (based on a generic “reference building”) toward one that rewards actual “before and after” improvements in specific buildings; 

adopting a “sliding scale” of incentives starting at 20 percent; 

 making the incentive usable for REITs and other corporate structures

[Read the May 2011 letter from a coalition of over 80 diverse stakeholders calling for Senate legislation to reform the Section 179D tax incentive]  


The May 5, 2011 coalition letter to key members of the Senate Finance and Energy committees urging modification of the 179D tax deduction. 

In conjunction with the IRS notice released last week, the Department of Energy (DOE) in March plans to roll out a new web-based tool for modeling energy efficiency upgrades that, DOE hopes, will make it easier for building owners to determine if they qualify for the Section 179D tax deduction. The forthcoming tool is intended as a substitute for costly modeling requirements that have hampered the commercial real estate industry’s acceptance of the tax deduction over the years.

It is unclear how the anticipated new 179D modeling tool might interact with a separate energy efficiency asset-rating program being developed by DOE, one that would be based on a building’s physical, “as-built” design attributes. DOE is calling on real estate stakeholders to participate in a pilot program for the Asset Rating this spring to determine how any “design” standard works in the field before it is released to market later this year.

Given the potential for overlap and redundancy between the new modeling tool and asset-rating program (along with time-consuming reporting requirements), The Roundtable is urging DOE to develop a single tool that could accomplish the goals of both initiatives.  

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Roundtable, Coalition Partners Urge Broader Business Input on PCAOB Initiatives, Including Mandatory Audit Firm Rotation  

The Financial Instruments Reporting and Convergence Alliance (FIRCA) — a coalition of 10 organizations including The Real Estate Roundtable — wrote to the Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB) last week to express concern about “auditing proposals that have the potential to muddle financial reporting, drive up compliance costs, skew financial activity and prevent companies from engaging in proved business practices.”  

 2012_02_23 IMAGE - PCAOB FIRCA Letter 

February 23, 2012 letter from The Financial Instruments Reporting and Convergence Alliance (FIRCA) to the Public Company Accounting Oversight Board (PCAOB)

Of particular concern to the coalition is the PCAOB’s proposed “concept release” on mandatory audit firm rotation. Under the Sarbanes-Oxley Act of 2002 (SOX), this is defined as the imposition of a limit on the period of years in which a particular public accounting firm registered with the PCAOB may be the auditor of record for a particular public company. The law also directed the U.S. General Accounting Office (GAO) to study the potential effects of requiring registered public companies to periodically rotate the public accounting firms that audit their financial statements.

As the business coalition’s Feb. 23 letter states, GAO found the concept of mandatory audit firm rotation to be “extremely problematic.” 

GAO’s Feb. 2004 letter to the then-chairman and ranking member of the Senate Banking Committee concluded, “If audit committees regularly evaluate whether audit firm rotation would be beneficial, given the facts and circumstances of their companies’ situation, and are actively involved in helping to ensure auditor independence and audit quality, many of the intended benefits of audit firm rotation could be realized at the initiative of the audit committee rather than through a mandatory requirement.”  (.pdf of Feb. 2004 GAO Mandatory Audit Firm Rotation Study)  

2012_02_23 IMAGE - SEC Audit FIRCA Letter 

February 23 letter from FIRCA to the Securities and Exchange Commission (SEC)

The coalition’s letter to the PCAOB last week urged the board to incorporate more input from the business community as it develops auditing proposals, e.g., through the formation of a business advisory group, and having a FIRCA representative participate in upcoming roundtables on mandatory audit firm rotation.

“We believe that an organization dedicated to promoting transparency should also be transparent in its own operations and deliberations,” the coalition asserted. “Subjecting such a group to . . . sunshine requirements will insure an openness providing a means of understanding of the PCAOB deliberations and thinking in the development of priorities and proposals.”

The coalition also urged that the PCAOB’s accounting and auditing standards be subject to cost-benefit analysis, which “will allow all market participants and the SEC to have a better understanding regarding implementation issues, as well as a keener awareness of potential adverse consequences that may be corrected.” 

Source:  The Real Estate Roundtable


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