Guide to the Energy Efficient Commercial Buildings Deduction

Appendices

EPAct 2005 (Public Law 105-58) (1.49 mb)

Section 1331: Energy Efficient Commercial Buildings Tax Deduction (56 kb)

Internal Revenue Bulletin 2009-26, June 26, 2009

NEMA comments on IRB

Guidance on Energy Policy Act Commercial Building’s Tax Deduction Certification Letters (84 kb) (56 kb)

EfficientBuildings.org

• Introduction
• The Energy Efficient Commercial Buildings Tax Deduction
• Commercial Buildings Tax Deduction (All Systems)
• Commercial Buildings Tax Deduction (Partial Systems)
• Commercial Buildings Tax Deduction (“Interim Lighting Rule”)
• Building Types Covered
• Who Gets the CBTD
• Project Certification (All or Partial Systems)
• Project Certification (Interim Lighting Rule)

Introduction

According to the U.S. Department of Energy, lighting represents 40% of the average commercial building’s electric bill, followed by motors/HVAC (40%) and other equipment (20%).

For years, energy-efficient lighting solutions have been available that can reduce lighting energy costs while maintaining or potentially improving lighting quality. According to the Energy Cost Savings Council, energy-efficient lighting projects generate an average 45% return on investment, paying for themselves in just 2.2 years. Due to energy codes and its economic advantages, energy-efficient lighting is now a common feature in new construction; lighting is generally considered the easiest, most profitable investment in energy-saving building systems.

According to the Department of Energy, however, only 20% of existing commercial buildings feature some degree of upgraded lighting technology, while 80% continue to operate lighting systems installed before 1986. The reason typically given is initial cost of changing out an older lighting system and replacing it with a newer one. Energy-efficient lighting typically costs more to purchase and necessitates skilled labor for its installation.

The Energy Efficient Commercial Buildings Tax Deduction was created to enhance the financial attractiveness of investment in the most energy-efficient lighting and other building technologies.

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THE ENERGY EFFICIENT COMMERCIAL BUILDINGS TAX DEDUCTION

The Energy Efficient Commercial Buildings Tax Deduction (CBTD) is a special financial incentive created by the Energy Policy Act of 2005 and designed to reduce the initial cost of investing in energy-efficient lighting and other building systems via an accelerated tax deduction.

This special tax deduction allows building owners (or tenants) to write off the complete cost of upgrading a building’s indoor lighting, HVAC/hot water and building envelope in the year the new equipment is placed in service, capped at $1.80/sq.ft. Alternately, the owner (or tenant) could upgrade one of these three systems to earn the CBTD capped at $0.60/sq.ft. In short, with the CBTD, the cost of new lighting or other building systems can be claimed in a single tax year instead of amortized over a period of years.

The CBTD expiration date has been extended twice, most recently by the Energy Independence Act of 2007 (EISA). With this extension, the CBTD can be claimed for qualifying projects completed before January 1, 2014.

Tax Deduction Versus Tax Credit A tax deduction is a cost subtracted from adjusted gross income when calculating taxable income; tax liability is not reduced dollar for dollar, as is the case with a tax credit, but instead in proportion to the taxpayer’s tax bracket.

 

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WHO GETS THE CBTD

If the building is a privately owned building…

If the building is a publicly owned building…

Owner of the asset for tax purposes can claim the CBTD Typically the building owner, but may be the tenant(s) if a lease building and the tenant(s) pay for the upgrade; in this case, they would have to agree on who the owner is for tax purposes beforehand If two or more taxpayers install energy-efficient property on or in the same building, the applicable total CBTD must be shared among the taxpayers

Person who creates the technical specifications for installation of the energy-efficient property can claim the CBTD, according to IRS Notice 2008-40 If more than one designer is involved, the CBTD may be allocated by “owner” to designer primarily responsible for the design or among the designers In some projects involving ESCOs, the ESCO is the owner for tax purposes

Deducting What’s Left Over What if a project costs X but the CBTD only covers a portion of X? In this event, the remainder is deducted normally. So if a retrofit project in a 100,000-sq.ft. commercial office building costs $100,000 and the cost is $0.60/sq.ft., then $60,000 could be the gross deduction in the tax year the new lighting is placed in service, while the remaining $40,000 would be deducted normally—capitalized and amortized over time.

 

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PROJECT CERTIFICATION: ALL OR PARTIAL SYSTEMS

The process of certification of projects applying for the complete or partial-system CBTD is outlined in IRS Notice 2006-52.

To qualify for the CBTD, the project must be certified that it will reduce the building’s total energy and power costs by a certain amount compared to a Reference Building. Only reductions caused by upgrading interior lighting, HVAC/hot water and building envelope can contribute to the CBTD; reductions in other energy uses, such as process loads, refrigeration and exterior lighting, do not count.

A Reference Building is a building located in the same climate zone and otherwise comparable to the taxpayer’s building except its interior lighting, HVAC/hot water and building envelope meet the minimum requirements of ASHRAE/IESNA 90.1-2001.

The energy performance of the Reference Building is determined using the Performance Rating Method in Appendix G of ASHRAE/IESNA 90.1-2004as well as additional requirements from the 2005 California Title 24 Nonresidential Alternative Calculation Method Approval Manual. These procedures have been automated in several software programs recognized by the Department of Energy as being acceptable for CBTD projects. This analysis can be performed by any professional(s) that the owner would like to have perform it.

Once the energy analysis demonstrates the necessary reduction in energy and power costs, the project must be certified by an engineer or contractor who 1) is properly licensed in the jurisdiction where the building is located, 2) doesn’t work for the taxpayer, and 3) has notified the taxpayer that he or she has the requisite qualifications to certify the project.

According to IRS Notice 2006-52, the certification must contain contact information for the certifier, address for the taxpayer’s building, and a statement that:

• the upgraded (or to be upgraded) building systems and/or features will reduce the building’s total annual energy and power costs by the required percentage compared to a Reference Building that meets the minimum requirements of ASHRAE/IESNA 90.1-2001;
• the amount of the reduction was determined under the rules of IRS Notice 2006-52;
• field inspections of the building performed by the certifier have confirmed that the building has met or will met its energy-saving targets, and that these inspections were performed in accordance with those procedures contained in the National Renewable Energy Laboratory’s Energy Savings Modeling and Inspection Guidelines for Commercial Building Federal Tax Deduction that are in effect at the time of the certification;
• the building owner has received an explanation of the building’s energy efficiency features and projected annual energy costs;
• qualified computer software was used to perform the required calculations;
• presents a list identifying the components of the interior lighting, HVAC/hot water and building envelope features installed on or in the building, those features that are energy-efficient, and their projected annual energy costs; and
• a declaration that the contents of the certification are “true, correct and complete.”

NEMA has published a series of boilerplate certification letters here.

While the taxpayer does not need to attach the certification to their tax return, they must by law keep sufficient records to demonstrate they are entitled to the CBTD and in the designated amount.

 

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PROJECT CERTIFICATION: INTERIM LIGHTING RULE

The process of certification of projects applying for the CBTD under the Interim Lighting Rule is outlined in IRS Notice 2008-40.

To qualify for the CBTD, the project must be certified to reduce interior lighting power density by 25-40% below the maximum allowances published in ASHRAE/IESNA 90.1-2001, while meeting other requirements related to controls and light levels.

Note that although IRS Notice 2006-52 says qualified computer software must be used to calculate energy and power consumption and costs, this is not needed to demonstrate compliance with the Interim Lighting Rule. Instead, a spreadsheet or similar software can be used to simply compare lighting power density for the Proposed Building versus ASHRAE/IESNA 90.1-2001. This analysis can be performed by any professional(s) that the owner would like to have perform it.

Once a suitable reduction in lighting power density is demonstrated, the project must be certified by an engineer or contractor who 1) is properly licensed in the jurisdiction where the building is located, 2) doesn’t work for the taxpayer, and 3) has notified the taxpayer that he or she has the requisite qualifications to certify the project.

According to IRS Notice 2008-40, the certification must contain contact information for the certifier, address for the taxpayer’s building, and a statement that:

• interior lighting systems have been, or are planned to be, incorporated into the building that meet all of the requirements of the Interim Lighting Rule (suitable reduction in lighting power
• field inspections were performed by a qualified individual after the lighting was placed in service in accordance with testing procedures prescribed in the National Renewable Energy Laboratory’s Energy Savings Modeling and Inspection Guidelines for Commercial Building Federal Tax Deduction (see pages 1-2) and in effect at the time of the certification;
• the inspections confirmed the building is meeting the specified reduction in lighting power density.
• the building owner has received an explanation of the energy efficiency features of the building and projected power density;
• presents a list of energy-efficient lighting components and features of the building, along with projected power density; and
• a declaration that the contents of the certification are “true, correct and complete.”

NEMA has published a series of boilerplate certification letters here.

While the taxpayer does not need to attach the certification to their tax return, they must by law keep sufficient records to demonstrate they are entitled to the CBTD and in the designated amount.

 

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