BDO

1. BDO BDO Seidman, LLP Accountants and Consultants Associated General Contractors of America – 2008 Convention Las Vegas, Nevada Energy Tax Credits and How They Impact Contractors

2. BDO BDO Seidman, LLP Accountants and Consultants • Deduction for Energy Efficient Buildings • Tax Credit for Energy Efficient Homes • Cost Segregation – 2008 Update

3. BDO BDO Seidman, LLP Accountants and Consultants Deduction for Energy Efficient Commercial Buildings Energy Policy Act of 2005 and Tax Relief and Health Care Act of 2006

4. Energy Policy Act of 2005 • The law includes tax credits or deductions for: • Energy-efficient new homes and energy-efficient improvements to existing homes • Energy-efficient commercial buildings • Energy-efficient appliances • Non-conventional source production • Solar energy • Alternative technology vehicles • Etc.

5. Energy Efficient Commercial Buildings • IRC Section 179D allows an immediate depreciation deduction for the owner and/or lessee of a building (similar to “Bonus Depreciation”) • Qualifying Property: • Depreciable property • Installed in buildings located in the U.S. that are within the scope of ASHRAE Std. 90.1-2001 • Property is part of building’s lighting system, HVAC system and/or building envelope. • Property must be certified

6. Energy Efficient Commercial Buildings • Certified reduction of total energy and power costs by 50% (with respect to lighting, HVAC, and building envelope) as compared to a “Reference Building” per ASHRAE Std. 90.1-2001 • Maximum deduction $1.80 per sq. ft. for whole building (not to exceed cost of energy efficient property) • Partial building deduction of up to $.60 per sq. ft. for 16.67% reduction (lighting, HVAC, or envelope)

7. In-Service Dates • Property must be placed in service between January 1, 2006 through December 31, 2007 (Energy Policy Act of 2005) • Deduction is extended for property placed in service through December 31, 2008 (Tax Relief and Health Care Act of 2006)

8. Lighting Systems – Two Rules • Permanent rule – reduction of 16.67% compared to ASHRAE Std. 90.1-2001 • Interim rule • Reduction in lighting power density (LPD) of 25% to 40% (50% for warehouses) • Controls and circuiting comply with mandatory and prescriptive requirements of Std. 90.1-2001 • Bi-level switching except hotels, storerooms, restrooms and public lobbies • Minimum lighting levels per IESNA (9th edition)

9. Lighting Power Density

10. Method of Computation • Reduction in LPD between 40% and 25% (50% for warehouses) • Deduction = $.60 / sq. ft. x (1.0 - 3⅓ x (0.4 - LPD)) • @ 30%: 0.6 x (1.0 – 3.33 x (0.4 - 0.3)) = $.40 / sq. ft. • @ 25%: 0.6 x (1.0 – 3.33 x (0.4 - 0.25)) = $.30 / sq. ft • Performance Rating Method (PRM) • Calculate building energy and power costs • Reference Bldg – Std. 90.1-2001 • Interior lighting • Heating, cooling, ventilation, hot water • (Ref. building) – (proposed building) = % reduction

11. Method of Computation • ASHRAE Std. 90.1-2001 Reference Bldg. within same climate zone and serves same purpose • Additional requirements under 2005 California Title 24 Nonresidential Alternative Calculation (ACM) approval manual • Congress intends that the methods for calculation be fuel neutral (same for electric, gas, etc.)

12. Example of Deduction

13. Certification • Qualified individual must be engineers or contractors licensed in the jurisdiction where building is sited • Certification must include: • Name, address, phone no. of certifier • Address of building • Statement 50%, 16 ⅔%, interim lighting standards • Determined under Notice 2006-52 • Field inspections

14. Certification • Owner received an explanation of energy efficient features • Qualified computer software (DOE approved) • Identification of energy efficient components of the building • Signed by certifier under penalty of perjury

15. Important Considerations • Proactive Design is important; legislation was developed to ensure that “free riders” would be minimal • LEED certification does not necessarily guarantee that building qualifies for deduction but certainly increases chances • Deduction for energy efficient commercial buildings expires on January 1, 2009

16. BDO BDO Seidman, LLP Accountants and Consultants Tax Credit for Energy Efficient Homes Energy Policy Act of 2005 and Tax Relief and Health Care Act of 2006

17. Energy Policy Act of 2005 • The law includes tax credits or deductions for: • Energy-efficient new homes and energy-efficient improvements to existing homes • Energy-efficient commercial buildings • Energy-efficient appliances • Non-conventional source production • Solar energy • Alternative technology vehicles • Etc.

18. Energy Efficient Homes - Criteria • Home builders (and producers of manufactured homes) are eligible for a $2,000 credit for a new energy efficient home • Home must achieve 50% energy savings for heating and cooling over the 2004 International Energy Conservation Code (IECC) requirements • At least 20% of the energy savings must come from building envelope improvements

19. Energy Efficient Homes - Criteria • Producers of manufactured homes that achieve 30% savings over IECC requirements or meet EPA’s Energy Star® requirements are eligible for a $1,000 credit • At least 33% of the energy savings must come from building envelope improvements

20. In-Service Dates • Home construction must be substantially completed after August 8, 2005 • Homes must be acquired from eligible contractor for use as residence between January 1, 2006 and December 31, 2007 (Energy Policy Act of 2005) • Tax credit is extended for homes acquired through December 31, 2008 (Tax Relief and Health Care Act of 2006)

21. Certification • Qualified individual must be engineers or contractors licensed in the jurisdiction where dwelling is sited • Certification must include: • Name, address, phone no. of certifier • Address of dwelling • Statement of 50% or 30% savings • Determined under Notices 2006-27 / 2006-28 • Field inspections

22. Certification • Owner received an explanation of energy efficient features • Qualified computer software (DOE approved) • Identification of energy efficient components of the building • Signed by certifier under penalty of perjury

23. Important Considerations • With the exception of manufactured homes, the tax credit is not directly linked to Energy Star® • Refer to Residential Energy Services Network (Resnet) Pub. #05-001 for certification procedures • Tax credit for energy efficient homes expires on January 1, 2009

24. BDO BDO Seidman, LLP Accountants and Consultants Cost Segregation – 2008 Update Increasing Current Cash Flow through Accelerated Depreciation

25. Cost Segregation Asset Class - Before (Construction or Acquisition) Asset Class - After (Construction or Acquisition) 39-Year Real Property 39-Year Real Property 5 or 7 Year Personal Property 15-Year Land Improvements

26. Cost Segregation Benefits Accelerated Federal Tax Depreciation Increased Current Cash Flow Business Growth

27. Federal Tax Depreciation - MACRS 1st Year Depreciation 5 Year –20% 7 Year –15% Annual Depreciation Rate (%) 15 Year –5% 39 Year – 2% Year

28. Economic Stimulus - Bonus Depreciation • 30% or 50% Bonus Depreciation on 5-year, 7-year and 15-year Property Acquired or Constructed between Sept. 11, 2001 and December 31, 2004 • Bonus Depreciation on “Qualified Leasehold Improvement Property” which Includes Certain 39-year Property • 50% Bonus Depreciation revived for calendar year 2008 per the recently enacted Economic Stimulus Package. All previous rules apply

29. 50% Bonus Depreciation 50% Bonus Depreciation – Re-Instated for Calendar Year 2008 1st Year Depreciation 5 Year – 60% 7 Year – 57% 15 Year – 53% Annual Depreciation Rate (%) 39 Year – 2% Year

30. Prior Year Projects Qualify • Re-classify prior year assets without amending tax returns (File Form 3115) • Sec. 481(a) adjustment (“catch-up depreciation”) may be fully recognized in the year of change • Can recover “Bonus Depreciation” for assets placed in service between Sept. 11, 2001 and December 31, 2004.

31. Cost Segregation Study – The Team Owner Architect Engineer Contractors BDO BDO Seidman, LLP Accountants and Consultants

32. When to Start? Design and Planning Phase During Construction Project Completion / Time of Purchase IRS Audit of Past Years

33. What Does the IRS Say? • “In general, a study by a construction engineer is more reliable than one conducted by someone with no engineering or construction background. However, the possession of specific construction knowledge is not the only criterion. Experience in cost estimating and allocation, as well as knowledge of applicable law, are other important criteria.”

34. 39-Year Real Property

35. 15-Year Land Improvements

36. 15-Year Land Improvements

37. 5-Year / 7-Year Personal Property

38. 5-Year / 7-Year Property - Manufacturing

39. 5-Year / 7-Year Property - Manufacturing

40. Construction Cost Qualifying forAccelerated Depreciation Type of Facility 35 95 20 70 25 60 20 35 15 30 15 35 5 15 5 15 5 10 Percentage of Construction Cost

41. Laboratory / Research Center Cost $6.7 Million 1st Year Increased Cash Flow $154,000 NPV of Increased Cash Flow $416,000 Real Property 55% Personal Property 34% Land Improvements 11%

42. Manufacturing Facility Facility Cost $4.4 Million • 1st Year Increased Cash Flow $276,000 • (w/ 50% Bonus Depreciation) • NPV of Increased Cash Flow $256,000 Personal Property 21% Real Property 66% Land Improvements 13%

43. Energy Benefits and Cost Segregation You Client