Environmental Tax Incentives Applicable to Real Estate
by Jeff Dorrill and Erin Watkins
There are a myriad of federal and Texas tax breaks, as well as other incentives, designed to encourage Texas real estate developers to go green. Here’s a sampling of some of these incentives:
Federal Income Tax Deduction for Cleaning Brownfields. Many former industrial properties remain unused or underutilized due to the high (or unknown) cost of cleaning possible contamination on such properties, generally known as “brownfields.” Section 198 of the Internal Revenue Code (IRC) allows taxpayers to fully deduct certain environmental cleanup costs at eligible properties in the year incurred (as opposed to capitalizing such costs over time).
An eligible property is any property (i) that is held by the taxpayer for use in trade or business or for the production of income or is includable in the taxpayer’s inventory, (ii) at or on which there has been a release (or threat of release) or disposal of any petroleum products or other hazardous substances, and (iii) that is not listed on the Environmental Protection Agency’s National Priorities List. Additionally, taxpayers must obtain a statement from the applicable state agency (in Texas, the Texas Commission on Environmental Quality (TCEQ)) verifying the property’s eligibility. The deduction is currently set to expire December 31, 2011.
Texas Litigation Relief for Cleaning Contaminated Sites. The TCEQ administers a Voluntary Cleanup Program (VCP), which provides, among other incentives, liability protection against claims by the state to encourage the cleanup of contaminated sites in Texas. Specifically, the VCP protects non-responsible parties, including future lenders and landowners, against liability to the State of Texas for cleanup of sites. The party entering into the VCP must properly apply and be accepted into the program, agree to a schedule for the proposed cleanup and pay VCP oversight costs.
Texas Property Tax Abatement for Cleaning Contaminated Sites. Texas Tax Code section 312.211 gives municipal and county tax units the right to grant property tax abatements with respect to the development or redevelopment of brownfield sites. Subject to certain conditions, these tax units may enter into a tax abatement agreement with a property owner who meets established cleanup requirements. Such agreement may exempt from taxation up to (i) 100 percent of the property’s value in the first year, (ii) 75 percent in the second year, (iii) 50 percent in the third year, and (iv) 25 percent in the fourth year.
Texas Property Tax Incentive for Using Renewable Energy. Under Texas Tax Code section 11.27, taxpayers are entitled to a property tax exemption equal to the appraised value of the taxpayer’s property arising from the installation or construction of a solar- or wind-powered energy device primarily intended for the production and distribution of energy for on-site use.
An example probably best explains how this exemption works. If a business were considering installing in a building a solar-powered heating device that would cost $500,000 and would add to the building’s value $500,000, the business would be entitled to a $500,000 property tax exemption because that is the amount by which the building’s appraised value increased as a result of installing the solar-powered heating device.
Federal Income Tax Credits for Renewable Energy. The advanced energy manufacturing tax credit is a significant potential tax credit available to manufacturing facilities. The credit equals 30 percent of a taxpayer’s investment establishing, re-equipping or expanding a manufacturing facility that produces certain renewable energy equipment and technologies (IRC § 48C). The alternative fuel vehicle refueling property credit applies to properties on which the owner installs a clean-fuel vehicle refueling facility. The credit is 30 percent of the cost of installing such facility (IRC § 30C).
Federal Income Tax Deduction for Energy Efficient Retrofitting. Additionally, IRC section 79D offers a deduction of up to $1.80 per square foot to assist with the costs of constructing or retrofitting a commercial building with certain energy efficient property.
More Federal Green Incentives on the Horizon. It appears the country stands poised to continue moving in this direction. On February 3 of this year President Obama announced his “Better Buildings Initiative,” which will strive to make commercial buildings 20 percent more energy efficient over the next decade. In connection with this initiative, the President’s proposed budget includes new tax incentives for commercial building upgrades (including changing the section 79D deduction to a credit), more financing for energy efficiency retrofit loans for small businesses, and programs that incentivize organizational leaders to save energy through commitments to efficiency.