1. www.mcmcpa.com Stephen M. Lukinovich, CPA, CVA, PFS Wally S. Brown, CPA

2. www.mcmcpa.com 2

3. 3 » Energy consumption ˃Buildings represent 39% of US primary energy use » Electricity consumption ˃Buildings represent 70% of US consumption » Water use ˃Buildings use 12% of ALL potable water » Use of materials ˃Buildings represent 40% of raw materials GLOBALLY 3

4. www.mcmcpa.com 4 » Energy Efficient Commercial Building Deduction ˃EPAct (Energy Policy Act) » Section 179D deduction adopted in 2005 and extended to 12/31/2014

5. www.mcmcpa.com 5 Energy efficient commercial building deduction – Owner or lessee of commercial building located in the United States o Installs energy efficient property – Lighting - 60 ₵ /sq foot – HVAC - 60 ₵ /sq foot – Building Envelope - 60 ₵ /sq foot o Must improve on standard by 50% o Obtain a certification o Inspected and certified by “qualified” individuals NOTES: 1)Multi-family buildings 4 stories or more above ground 2)"Primary Designers” of government buildings – free non-cash tax deduction – Section 179D 3)Deduction in retrofit cannot be greater than cost

6. www.mcmcpa.com 6 » DOE goal to incentivize green design in government building sector » Includes:  Federal - offices, military bases, court houses, post office  State - offices, transportation facilities, state universities, court houses  City - offices, schools, town halls, police, fire, libraries » “Primary Designers”  Includes architect, engineers, contractors, environmental consultants or energy services providers

7. www.mcmcpa.com 7 » Whole building deduction ($1.80/SF) ˃50% reduction below standard (ASHRAE 90.1 2001) » Permanent and interim rules to gain partial deductions » Other technical requirements ˃Minimum lighting ˃Bi-level switching » Independent certification ˃IRS - approved software required in most cases

8. www.mcmcpa.com 8 » Announced by IRS in December 2010 » Applies for prior year missed §179D ˃Now available for more than 3 previous tax years » Do not amend prior-year tax returns » Reflect prior year § 179D deductions missed on current year tax return - Form 3115, § 481(a) full year deduction - Federal, AMT and State

9. www.mcmcpa.com 9

10. 10 » Originally enacted as part of Economic Recovery Tax Act of ‘81 to provide an incentive for increased research funding » Used primarily by large Fortune 1000 companies » Extended/Altered at least 15 times; currently extended through 12/31/2014; Further extensions expected » Governed by Internal Revenue Code Section 41 (20% credit on qualifying expenditures) and Section 174 (defining research and experimentation expenditures) » Traditional definition vs. current tax definition ˃Traditional – focused on discovery ˃Tax – 4 requirements – New or improved business component – Technological in nature – Elimination of uncertainty – Process of experimentation » Reported on form 6765 – Credit for Increasing Research Activities

11. www.mcmcpa.com 11 » R & D is only for companies that are inventing something new ˃Improving or modifying as existing product or improving a manufacturing process » Only for companies with test tubes, laboratories and white lab coats » Only for large companies » Won’t help with state taxes ˃38 states have R&D credits or similar incentives

12. www.mcmcpa.com 12 1.New or improved business component ˃Eligible activity must relate to a new process or product with the intent to improve: +Function +Performance +Reliability +Quality +Durability

13. www.mcmcpa.com 13 2.Technological in Nature ˃Eligible activity must rely on principles of hard sciences: +Physical +Chemical +Biological +Computer +Engineering ˃Does not apply to soft sciences: Economics, Psychology, Management Sciences

14. www.mcmcpa.com 14 3.Elimination of Uncertainty ˃Eligible activity must seek to discover information to eliminate uncertainty related to: +Capability – can we produce this? +Process – how? +Final Design – what will it be/ look like?

15. www.mcmcpa.com 15 4.Process of Experimentation ˃Eligible activity involves the following experimentation: +Evaluation of a process and its alternatives +Testing, analyzing or confirming hypothesis +Refining or discarding hypothesis as determined appropriate +Includes modeling, simulation, trial & error testing *Note: A successful outcome is not required – Failed R&D is R&D!

16. www.mcmcpa.com 16 » Wages* - includes partnership earnings subject to S/E tax » Supply costs » 65% of Contract Research costs paid to external providers *Wages include salary and wages of those who are participating in the R&D activity as well as a portion of those individuals that provide direct support and direct supervision

17. www.mcmcpa.com 17 » Determining the amount of credit » There are 2 ½ methods (alternatives) for calculating the credit » Regular Credit » Reduced Credit Method – same as Regular Credit with a twist » Alternative Simplified Credit – once elected, this method applies to current and all future years

18. www.mcmcpa.com 18 » Calculated as 20% of Qualifying Research Expenditures (“QRE”) in excess of the company’s fixed base percentage; not to exceed 50% of current year QRE’s » The fixed-based percentage is determined by dividing aggregate qualified research expenses by aggregate gross receipts for base tax periods, which are determined as based upon when the company was formed » The fixed-based percentage cannot exceed 16% ˃It is 3% for start-up companies » Reduce deductible expense by amount of credit

19. www.mcmcpa.com 19 » Same as Regular Credit Method, except rate is 13% rather than 20%, and no add-back to income is required

20. www.mcmcpa.com 20 QRE’s – Year 1 - $ 950,000 Year 2 - $1,000,000 Year 3 - $1,050,000 Year 4 - $1,000,000 Fixed Base Percentage (Start-up) = 3% (Column 1) Fixed Base Percentage (Maximum) = 16% (Column 2) Average Gross Receipts$5,000,000 X FBP % 3% 16% $150,000$800,000 QRE’s$1,100,000 Less: Final Base Amount (150,000) (800,000) $950,000$300,000 Limited to 50% of QRE’s$550,000$300,000 Reduced Credit – 20%$110,000$60,000 Reduced Credit – 13%$71,500$39,000 Assumptions: $5 Million Gross Revenues in each of years 1-4

21. www.mcmcpa.com 21 » Calculated as 14% of QRE’s in excess of 50% of the net average QRE’s for the previous 3 years » If no QRE’s were recognized in any of the previous 3 years, the credit is a straight 6% of current year QRE’s

22. www.mcmcpa.com 22 » Same Assumptions Current Year QRE’s$1,100,000 Less: 50% of Previous 3 year average(500,000)(.95M = 1M +1.05M) / 6 Amount subject to credit$600,000 Limited to 50% of QRE’s$550,000 Alternative Simplified Credit - 14%$84,000 Current Year QRE’s$1,100,000 Less: 50% of Previous 3 year avg. (500,000)(.95M + 1M +1.05M) / 6 Amount subject to credit$600,000 Alternative Simplified Credit - 14%$84,000

23. www.mcmcpa.com 23 » Active participant / owner » Not generally in AMT situation » Have positive net taxable income » As a rule of thumb, generally need to have over $1 Million wages for eligible participants

24. www.mcmcpa.com 24 Examples of eligible activities and innovations include the following: » Determining alternate materials with which to construct a structure or parts of a structure (must be a new concept to the taxpayer) » Determining alternate means of assembling and/or fastening component parts of a structure (must be a new concept to the taxpayer) » Improving acoustical qualities of structure » Developing alternative water flow / plumbing systems » Developing alternative electricity conduction systems » Developing or improving lighting within a structure

25. www.mcmcpa.com 25 » Improving or developing alternative ventilation for a structure » Improving or determining alternative heating and cooling systems » Determining alternative structural design » Developing processes or equipment for the extraction of natural elements from another substance, or the development of processes and equipment to convert the extracted materials. » Developing a pilot plant to investigate the concepts of a model or process » Toxic waste and other waste disposal processes integrated into the structure

26. www.mcmcpa.com 26 » Integrating product and material transportation systems into the functional design of the structure » Environmental impact studies » Integration costs related to designing multiple co- dependent features, where the technical uncertainty may only be eliminated by designing the related components » Implementation of counter-terrorism capabilities » Environmental design » Sustainable design

27. www.mcmcpa.com 27 » Space utilization » New materials » New technology » CAD modeling » Design testing » Special use design » Harsh environment design & testing

28. www.mcmcpa.com 28

29. www.mcmcpa.com 29 » Stephen M. Lukinovich ˃Stephen.lukinovich@mcmcpa.com » Wally S. Brown ˃wally.brown@mcmcpa.com » www.mcmcpa.com » 502.749.1900