On August 8, 2005, President Bush signed into law the Energy Policy Act of 2005 (EPAct 2005). Estimated to cost the U.S. government about $14.5 billion over 10 years, EPAct 2005 is the biggest overhaul of the national energy policy since 1992. Although considered less ambitious on energy's demand side than its supply side, EPAct 2005 does include a number of energy conservation provisions — several of which are of great interest to the lighting community.
One of the most significant provisions is the Energy Efficient Commercial Buildings Tax Deduction (Section 1331), which provides an accelerated tax deduction up to the entire cost of energy-efficient lighting systems, capped at a maximum of $0.60 per square foot.
Under current law, the cost of energy-saving investments must be capitalized and depreciated over time. According to EPAct 2005 (Section 1331): “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.”
“This provision is the first time a special deduction is available for expenses incurred for energy-efficient commercial building property,” says Kyle Pitsor, vice president, government relations, for the National Electrical Manufacturers Association (NEMA), Rosslyn, Va. “Lighting products and systems are ideally positioned for deployment using the deduction provision,” he says.
Specifically, EPAct 2005's Energy Efficient Commercial Buildings Tax Deduction can provide one of three possible tax deductions:
Commercial property — A deduction up to $1.80 per square foot of space for investment in energy-efficient commercial building property as part of new construction or renovation (within the scope of the ASHRAE/IES 90.1 Standard). The amount of the deduction is the lesser of $1.80 per square foot or the costs incurred/paid for the energy-efficient property.
“Energy-efficient property” is defined by EPAct 2005 to be commercial building property that is certified to reduce total annual energy and power costs to at least 50% less than a building satisfying the 90.1-2001 Standard. Qualifying systems include: interior lighting systems; heating, cooling, ventilation, and hot water systems; and a building envelope. The property must also meet these criteria: 1) be otherwise depreciable; 2) be located in the United States; 3) be paid to be constructed by the taxpayer seeking the deduction.
Individual systems — EPAct 2005 instructs the Secretary of the Treasury, in consultation with the Secretary of Energy, to develop an energy-savings target for each type of system covered (e.g. interior lighting, HVAC/hot water, building envelope). If a property does not qualify for the $1.80 per-square-foot tax deduction, but one of its qualifying systems meets its designated energy-savings target, then the property could still be eligible for a partial tax deduction.
For example, if a commercial building property does not meet the requirement, but the interior lighting system meets its own energy-savings target, then a partial tax deduction may be allowed. This individual system deduction is the lesser of $0.60 per square foot or the costs incurred or paid for the energy-efficient system. However, as of early February 2006, the rules regarding deductions for individual systems have not been issued by the Treasury Department.
Interim rules for lighting systems — EPAct 2005 established interim rules for lighting systems, which remain in effect until the Secretary of the Treasury issues final regulations defining the above energy-savings target for lighting systems. The interim rules for lighting systems define the lighting system energy-savings target to be a lighting power density that is 25% to 40% lower than the minimum requirements in Table 18.104.22.168 or Table 22.214.171.124 (not including additional interior lighting power allowances) of Standard 90.1-2001. Once this target is met, the system qualifies for a $0.30 to $0.60 per-square-foot tax deduction. For warehouses, the lighting power density must be 50% lower than the minimum requirements of Standard 90.1-2001 so as to qualify for a $0.60 per-square-foot tax deduction.
It's important to note that Standard 90.1-2001 is defined as the standard in effect as of April 2, 2003. Properly identifying what version of the standard applies is important because after April 2, 2003, Standard 90.1-2001 was amended with Addendum g, which reduced the lighting power densities to values that are now adopted in Standard 90.1-2004. States that adopt Standard 90.1-2001 may do so with or without amendments. For the purpose of claiming the tax deduction, Standard 90.1-2001 without Addendum g applies.
The Table defines various savings targets on a 25% to 40% scale, with associated maximum allowable tax deduction amounts per square foot of floor space.
Besides demonstrating a reduction in lighting power density levels, you must also meet all of the controls provisions noted in Standard 90.1-2001. This typically calls for the installation of bi-level switching in most occupancies. In addition, the application must meet the minimum requirements for calculated light levels as set forth in the 9th Edition of the IESNA Lighting Handbook.
What type of facility qualifies for the deduction? The deduction applies to property placed in service between January 1, 2006 and December 31, 2007, inclusive. The tax deduction is allowable in the year in which the energy-efficient property is placed in service. The original window was four years, but this was compressed to two years after intense Congressional negotiations moved to reduce the overall cost of the tax package. Congress may extend this window by an act of legislation, which NEMA plans to advocate by demonstrating the success of the deduction in stimulating energy savings in cooperation with its members and other industry participants.
Who gets to claim the deduction? In the case of privately owned buildings, the tax deduction is earned by the owner. In the case of publicly owned (federal, state, local government — or a political subdivision of one) buildings, the law states that the Secretary of the Treasury will create a regulation “to allow allocation of the deduction to the person primarily responsible for designing the property in lieu of the owner of such property. Such person will be treated as the taxpayer for purposes of this deduction.”
How is the deduction claimed? As of early February 2006, the Treasury Secretary has not yet issued rules that define the partial deduction by building system type, nor how these projects will be certified. In addition, the Secretary has still not updated its tax forms. But industry observers feel confident the Treasury Department will make this information available soon.
The certification program will likely be based on qualified software programs already in use by lighting professionals. And the interim lighting rules in effect today may also be accepted as the final partial deduction rules. Specifiers of lighting systems and building owners are encouraged to seek the consultation of a tax expert when pursuing a claim.
While this provision contains a lot of legal detail to take in, once the law's requirements are understood, the provision itself can be achievable by following good, fairly standard lighting practices, adhering to prevailing energy codes, and adopting readily available technologies.
DiLouie is the communications director for the Lighting Controls Association and principal of Zing Communications in Calgary.