while it has suffered its fair share of criticism for favoring energy's supply side, the Energy Policy Act of 2005 (EPAct 2005), which was passed by Congress on July 29, 2005, and signed into law on August 8, offers a number of favorable demand-side incentives. One of particular importance to lighting industry professionals is the Energy Efficient Commercial Buildings Tax Deduction, or Section 1331, an accelerated tax deduction to reward more investment in efficient lighting and other building systems.
Under current law, the cost of investments in energy-efficient lighting must be capitalized and depreciated over time. EPAct's Section 1331 allows the full cost of interior lighting equipment, subject to a cap of $0.60 per square foot, to be deducted during the taxable year that the equipment is placed in service, as long as it is otherwise depreciable equipment and meets certain efficiency criteria. This provision applies to commercial buildings in the United States, including both new construction and retrofits, and for now, offers a window of opportunity from January 1, 2006, through December 31, 2007. (The National Electrical Manufacturers Association, or NEMA, which lobbied for the provision, originally wanted a larger window, but Congress was concerned about the cost of the law's implementation. NEMA will likely lobby Congress to expand the effective window.)
According to NEMA, the accelerated tax deduction provision will generate about $500 million in additional sales of lighting systems and products to specifiers and building owners who are anxious to take advantage of the incentive while it is in place. NEMA also estimates the provision will reduce national electric demand by about 312MW and carbon emissions by about 10 million metric tons.
levels of deduction
The lighting component is only one of three applicable areas for tax savings. The full deduction offers a sum for each of these systems, and consequently, the total available deduction is significantly more per square foot, as clarified below.
complete deduction The complete tax deduction is actually the lesser of $1.80 per square foot, or the cost of the energy-efficient property as part of a new construction or renovation project (within the scope of the ASHRAE/IES 90.1 Standard). EPAct 2005 defines 'energy-efficient property' as building systems that are certified to reduce total annual energy and power costs to at least 50 percent less than a building satisfying the 90.1-2001 Standard. Qualifying systems include: (1) interior lighting; (2) heating, cooling, ventilation, and hot water; and (3) building envelope.
partial deduction As mentioned above, a partial deduction can be achieved just for lighting-that is, as soon as the rules are written. (Most were to be drafted by the Department of Energy in consultation with the Treasury Department by the end of January, but at this time, it is unclear when the Partial Deduction Rules will be ready.) EPAct 2005 instructs the Secretary of the Treasury to establish savings targets for the three types of qualifying systems (interior lighting; heating, cooling, ventilation, and hot water; and building envelope), with an accelerated tax deduction of $0.60 per square foot available for meeting each target respectively.
interim lighting rules
Until the above rules are written, the Interim Rules for Lighting Systems apply. Here, lighting professionals should take special interest. These rules define the interior lighting efficiency target to be a lighting power density (LPD) that is 25 to 40 percent lower than the maximum values in ASHRAE/IES 90.1-2001's Table 184.108.40.206 (building area method) or Table 220.127.116.11 (space-by-space method). If the efficiency target is certified to have been met, the building owner can earn an accelerated tax deduction that equals the lesser of (1) $0.30 to $0.60 per square foot, or (2) the full cost of the efficient lighting (see Table 1). The exception is warehouses: The lighting system must reduce LPD by at least 50 percent of the maximum values in the Standard to earn a tax deduction of up to $0.60 per square foot. The Secretary of the Treasury is currently working on procedures for inspection and testing, and ways to calculate and verify energy and power costs.
Many readers are now familiar with ASHRAE/IES 90.1-1999 or 2001, since a majority of states adopted Standard 1999 as the minimum requirements for their own energy codes in 2005, per a mandate from the Department of Energy. It is important to understand that the law recognizes the version of ASHRAE/IES 90.1-2001 without Addendum G, which means the listed LPD values are essentially the same LPD values as those listed in ASHRAE/IES 90.1-1999 (see Table 2).
Besides demonstrating a reduction in lighting power density beyond that demanded by Standard 90.1-2001, Section 1331 requires the following: All control provisions in the Standard must be met (e.g., automatic shut-off using control panels or occupancy sensors for buildings larger than 5,000 square feet, and tandem wiring required for magnetic ballasts); bi-level switching must be installed in all occupancies except hotel and motel guest rooms, store rooms, restrooms, and public lobbies; and the application must meet the minimum requirements for calculated light levels, as set forth in the ninth edition of the IESNA Lighting Handbook.
Claiming the Deduction
If the building is privately owned, the owner that paid for construction of lighting system can claim the deduction. However, if the building is publicly owned, such as a public school, hospital, or administration building, the tax deduction can be claimed by 'the person primarily responsible for designing the property in lieu of the owner. ... Such person will be treated as the taxpayer for purposes of this deduction.' While the specific regulations regarding public buildings have not been written yet, what the law says indicates that the primary designer of the efficient lighting system in a public building can claim the tax deduction him/herself.
Here are the rest of the particulars: The accelerated tax deduction is allowable in the year in which the lighting is placed in service. The lighting must be certified to meet its savings targets based on qualified software programs. (Rules, including applicable software programs, are currently being drafted.) At the time of writing, the Treasury Department was scheduled to modify its tax forms to implement the provision by the end of 2005. Lighting and building management professionals are encouraged to seek the consultation of a tax expert.
find out more
NEMA has assembled the Commercial Building Tax Deduction Coalition, including the IESNA, AIA, National Association of Electrical Distributors, and Building Owners and Managers Association, among many others, to make recommendations to the government regarding implementation of the provision, and also to help educate the public about the tax deduction. Its first initiative was to create a website at www.efficientbuildings.org as a clearinghouse for information about the provision.
Craig DiLouie, former editor and publisher of A|L, is principal of ZING Communications (www.zinginc.com), and a consultant, analyst, and reporter specializing in the lighting and electrical industries.