Energy and R&D Tax Credits for Businesses

1. Energy and R&D Tax Credits for Businesses By : Phil Drudy May 19, 2011

2. Overview • R&D Credits • Energy Credits • 179D deduction- LEEDS Buildings • The increasing role of engineers in tax planning.

3. Federal R&D Tax Credit Basics • Enacted in 1981. • Intended to encourage investment in engineering and the physical, biological, and computer sciences in the U.S. • Expired 14 times and extended 13 times, most recently expired EOY 2009. • Net benefit equals as much as about 9.1% of qualified costs. • The subject of, and influenced by, a myriad for statutory, regulatory, judicial, and administrative developments. • Taxpayers (amongst others) hold a range of misconceptions.

4. Federal R&D Tax Credit Basics • Eligible Expenditures: • Qualified Research Expenses (“QREs”) • Wages for performing or directly supporting or supervising qualified research. • Contract research expenses (65%, 75%, or 100%) . • Cost of supplies. • Computer rents/leases. • Basic Research Payments to Qualified Organizations. • Certain Amounts Paid to Energy Consortia for Energy Research.

5. Federal R&D Tax Credit Basics Credit Calculations Differ Over Time, By Company • For regular credit, BA equals “fixed-base percentage” times “average annual gross receipts” for four prior tax years, but the minimum BA is 50% of credit year QREs. *Because of the incremental nature of the credit, the option with the highest rate won’t necessarily deliver the largest credit. ** Maximum benefit reflects §280C(c) requirement to reduce R&D deduction by the amount of the credit. Alternatively, a taxpayer may elect a reduced credit. This “§280C election” must be made on a timely-filed, original return.

6. Significant Developments General Business Credits of Eligible Small Businesses • On September 27, 2010, the President signed the Small Business Jobs Act of2010, Pub. L. No. 111-240 (“Act”). • The Act amends Internal Revenue Code (“IRC”) Section 38(c)(5)(A), which provides that an “eligible small business” can offset both regular and alternative minimum tax liabilities with “eligible small business credits” for taxable years beginning in 2010. • In addition, the Act amends IRC Section 39(a) to extend the carryback period for unused eligible small business credits from one year to five years for the first tax year beginning in 2010.

7. R&D Tax Credits and Incentives for Investments In and Outside the U.S. • Eligible Activities Include: • Benefits: Process Engineering Federal: Design Engineering • Up to as much as almost 9% of qualified spending Manufacturing Engineering States: • Activities depending on engineering or the physical, chemical, biological, or computer sciences to develop/improve: • Majority of states provide benefits • Up to 40% of qualified spending • Refundable credits offered in some states, i.e., credits payable whether taxes are due or not • Products, Manufacturing Processes, Software

8. Updates to Green Incentives • Eligible for either the Section 48 ITC, Section 45 PTC, or Section 1603 grant • Must pay federal income taxes to qualify for ITC or PTC (expires 12/31/2016) • Do not need to pay federal income taxes to qualify for 1603 grant (expires 12/31/2011) • May not take more than one of the incentives • Can make an irrevocable election for certain qualified property to take the Section 48 Investment Tax Credit in lieu of the Section 45 (see IRB 2009-25) • ITC credit is 30% of expenditures with no maximum credit for property placed in service in years beginning on or after January 1, 2009 • No requirement for third party sales • No reduction of credit for subsidized or tax-exempt financing • Basis of property must be reduced by 50% of the amount of the credit • Remaining basis in property still eligible for bonus depreciation.

9. Business Energy Investment Tax Credit – Section 48 Did the taxpayer invest in alternative energy property to generate power for its own use? No additional benefit available NO NO YES • Is the property: • Qualified fuel cell? • Qualified small wind turbines? • Solar used to generate electricity for heating or cooling or to provide solar process heat? • Solar property used to illuminate a building using fiber optic distributed sunlight? • Is the property: • Equipment for producing or distributing geothermal energy? • Equipment that uses the ground or ground water to heat or cool a structure? • Qualified micro-turbines (small combustion)? • Combined heat and power systems? NO NO YES YES YES YES • 10% credit Was the property placed in service before 2016? YES 30% credit (10% for solar after 2016) Note that the credit for geothermal property, with the exception of geothermal heat pumps, has no stated expiration date.

10. Treasury Grant – Application for Section 1603 Payment

11. Energy –179 D Deduction • DEDUCTION FOR ENERGY EFFICIENT • COMMERCIAL BUILDINGS • – Sets forth procedurally and administratively the • requirements for § 179D(c) and (d) • – Clarification of partial deduction • • Reference Building • • Certification • • Qualified Person • • Qualified Software for Energy Modeling • • Definitions

12. NOT A CREDIT - IT IS A DEDUCTION • Subtitle C—Conservation and Energy Efficiency Provisions “SEC. 179D. ENERGY EFFICIENTCOMMERCIAL BUILDINGS DEDUCTION • “(a) IN GENERAL.—There shall be allowed as a deduction an amount equal to the cost of energy efficient commercial building property placed in service during the taxable year

13. Energy-Efficient Commercial Building Deduction -Section 179D Did the taxpayer build a new facility or renovate an existing facility? Did the taxpayer design a building for a government entity? No Section 179D benefit available NO OR NO NO YES YES • Did the new facility or renovation include installation of interior lighting, HVAC or hot water systems, and building envelope that reduces power use 50% or more? (compared to reference building) • If 50% reduction is NOT met, is energy reduced by 20% for lighting, • 20% for HVAC, or • 10% for building envelope? NO YES YES Certification may be completed by FTC&H Was the project certified? NO NO YES YES Potential $1.80 per square foot deduction (whole building) YES Was the property placed in service before 2014? Potential $0.60 per square foot deduction (lighting, HVAC, or envelope) YES NO NO No Section 179D benefit available

14. LEED BUILDINGS • LEADERSHIP IN ENERGY & ENVIRONMENTAL DESIGN • LEED Rating System: • NC = New Construction • EB = Existing Buildings • CI = Commercial Interiors • CS = Core & Shell • H = Homes • ND = Neighborhood Development • LEED Categories: • CERTIFIED = 26 – 32 points • SILVER = 33 – 38 points • GOLD = 39 - 51 points • PLATINUM = 52 – 69 points • PROJECT TOTALS = 69 POSSIBLE POINTS

15. SUMMARY OF TAX DEDUCTIONS

16. Engineers Role with Accountants • It started with • R&D Studies • Cost Segregation Studies • It Continues with • Energy Credits • Alternative Fuel

17. Emerging Technology • Accountants are depending more on Engineers For • Assistance in qualifying for Grants and Credits • Preparing the filing documents • Support for the tax positions • Documenting that technical requirements are meet

18. Phil Drudy, CPA, ESQ. Phil is a member of both the American Institute of Certified Public Accountants and the Partnership Taxation Committee. He is a past Chairman of the Partnership Committee of the NYSSCPA and is on the advisory board for the Executive’s Tax & Management Report newsletter, published by CACHE Publications. Phil has worked for national, Big Four firms, as well as regional firms in the New York Metropolitan area. This broad range of experience has helped him build substantial expertise in many aspects tax, including representation in front of the IRS, complex corporate compliance and structuring, and succession planning. Phil is a frequent speaker at seminars and conferences across the country on tax, estate planning, and business life‐cycle issues. He is often called upon by the national and local media for contribution on current topics in these areas, including The Tax Adviser and NJ Monthly. He has been quoted in The Wall Street Journal, The New York Times and several Bloomberg financial publications and has also been published in manuals and newsletters. Phil is a graduate of Brooklyn College with a B.S. in Science and a graduate of Brooklyn Law School with a Juris Doctor degree.