Answer: The Energy Efficient Commercial Buildings Deduction is Section 1331 of the Energy Policy Act of 2005. The Commercial Buildings Deduction, advocated by the National Electrical Manufacturers Association (NEMA) and the Natural Resources Defense Council (NRDC), is a special financial incentive for building owners to adopt the most energy-efficient lighting strategies.

The Deduction provides up to the entire cost of energy-efficient interior lighting to be deducted on the owner’s taxes in the year the lighting is placed in service, capped at $0.60/sq.ft., if the new lighting’s power use reduces lighting power density below the maximum allowable lighting power densities listed in ASHRAE/IES Standard 90.1-2001, and if other requirements are met.

Alternatively, a building could achieve a target level of savings for HVAC/hot water and building envelope in addition to lighting, and benefit from deducting the entire cost of all energy-saving upgrades capped at $1.80/sq.ft.

How can the maximum cap of $1.80/sq.ft. be earned for the tax deduction?

Answer: The Commercial Buildings Deduction offers an accelerated tax deduction equal to the complete cost of installing “energy-efficient commercial property” in a commercial building, capped at $1.80/sq.ft.

“Energy-efficient commercial building property” is defined as interior lighting systems, HVAC/hot water systems and building envelope features, which are ...

1) otherwise depreciable as a cost;

2) installed in the United States;

3) part of new construction or renovation within the scope of the ASHRAE/IES Standard 90.1-2001; and

4) certified to reduce total annual energy and power costs to at least 50% less than a building satisfying ASHRAE/IES Standard 90.1-2001.

What is the difference between a tax deduction and a tax credit?

Answer: The Commercial Building Tax Deduction is a tax deduction, not a tax credit. A tax credit is a direct dollar-for-dollar reduction of tax liability. A tax deduction is a cost subtracted from adjusted gross income when calculating taxable income; therefore, tax liability is not reduced dollar for dollar, but in proportion to the taxpayer’s tax bracket.

Many lighting projects result in tax deductions. Under current law, the cost of the new lighting must be capitalized and depreciated over time. Under the lighting rules in the CBTD, the owner can write off the entire expense of the new lighting, capped at $0.60/sq.ft., in the taxable year that the lighting is placed in service. So it is an accelerated tax deduction.

When does the Commercial Buildings Tax Deduction program expire?

Answer: The CBTD applies to costs incurred for equipment placed in service from January 1, 2006 through December 31, 2013, inclusive.

What does “placed in service” mean?

Answer: “Placed in service” is a tax term that is usually defined between the IRS and the taxpayer. In the case of new lighting, it is typically defined as the time at which the lighting is ready for its intended use.

What if my project cost is higher than the cap of $0.60/sq.ft.? How is the remaining cost treated tax-wise?

Answer: The remaining costs can be depreciated and claimed normally. So a qualifying project in a 100,000-sq.ft. building with a cost of $100,000 and 40% lighting power density savings could be eligible to deduct $60,000 in the taxable year the lighting is placed in service. The remaining $40,000 could then be deducted normally (i.e., capitalized and depreciated).

What if a commercial building tenant performs a retrofit that would meet the energy savings. Would they get the CBTD? Is the CBTD for privately owned buildings restricted to the owner, or can a management company or a tenant in a leased space take advantage of it as well?

Answer: Unfortunately, as in many matters of tax law, the answer is not necessarily clear. The entity that receives the CBTD is the entity that owns the asset for tax purposes. Although in many, if not most, instances, a tenant improvement will revert to the landlord at the end of a lease, the property is not necessarily owned by the landlord for tax purposes. It is a question of fact, and the determination depends on the arrangements between the parties. If the tenant pays for the investment, constructs it according to its own specifications, and there are no concessions in the lease or from the landlord, it is likely that the tenant will be the owner of the improvements for tax purposes and eligible to claim the CBTD.

Fortunately, this is a question that arose under the tax law before the enactment of the CBTD provision. In the case of tenant improvements, the tenant and landlord would have to determine who the tax owner is for purposes of claiming depreciation deductions in any event. The CBTD does not change that determination. The CBTD simply provides a more beneficial deduction that normally provided by depreciation.

The analysis is the same regarding improvements in government buildings. If the contractor is the owner for tax purposes, it can claim the CBTD. Whether a private person can be an owner of property with respect to a government building under the applicable local law is a factor that would have to be taken into account in determining who the owner is for tax purposes.

How should a taxpayer claim the Section 179D deduction related to energy efficient commercial buildings?

Answer: There is no special form to claim the deduction. The IRS instructions to business forms (e.g., Form 1120 for corporations, Form 1120-S for S corporations, and Form 1065 for partnerships) indicate that the taxpayer should include the amount of the deduction in the amount in the "Other deductions" line of the tax return. A statement listing the types and amounts of "other deductions" should be attached to the return. Tax preparers may also elect to use IRS Form 4562, Depreciation & Amortization; Part 2 of this form covers special depreciation allowances and other depreciation. The amount of the CBTD can be included in this section with other appropriate deductions, along with a statement listing the types and amounts of deductions included in the total deduction taken in this section of the form.

In addition, it is important that a taxpayer obtain and retain the necessary certifications and documentation to claim the CBTD (see IRS Notice 2006-52 for these requirements, which were subsequently amplified in IRS Notice 2008-40).

What types of buildings qualify?

Answer: The CBTD can be applied to any interior lighting project in any building that is within the scope of ASHRAE/IESNA 90.1-2001 and is located in the United States, including privately and publicly owned buildings. This includes public buildings, schools and rental housing. Rental housing must be within the scope of ASHRAE/IESNA 90.1-2001 and four stories or higher above grade. Specifically exempted buildings include single-family houses, multifamily structures three stories or fewer above grade, and manufactured houses (mobile or modular homes).

Publicly owned buildings such as public schools do not pay taxes and therefore cannot receive the CBTD; however, IRS Notice 2008-40 created regulations allowing the person or entity primarily responsible for creating the technical specifications for the new lighting to receive the CBTD. If more than one designer is involved, the CBTD may be allocated by the “owner” to the designer primarily responsible for the design or among the designers.

Religious buildings are covered by ASHRAE/IESNA 90.1-2001 but do not qualify for the CBTD. They do not pay taxes, but they are not government buildings.

IRS Notice 2008-40 adds unconditioned attached or detached garage spaces to the list of space types qualifying for the CBTD under the Interim Lighting Rule, as long as it has walls and a roof and is not a single-family house, multifamily building with three or fewer stories above grade, or a manufactured house (mobile or modular home).

Can parking lot lighting apply for the CBTD?

Answer: EPAct 2005 states that only interior lighting systems qualify for the CBTD benefit. As long as the project is within the scope of ASHRAE/IESNA 90.1-2001 and is interior lighting, then it qualifies for the CBTD.

Can portions of buildings be retrofitted and still qualify for the CBTD—for example, the common area versus tenant spaces, or a manufacturing area in the same building as a warehousing area?

Answer: It is possible to upgrade only portions of a building to higher-efficient lighting, with the CBTD based solely on the square footage of the upgrade space. Meanwhile, if a building contains dedicated spaces that are classified differently under ASHRAE/IESNA 90.1-2001—such as a manufacturing facility attached to a warehouse—these spaces must be treated separately, per ASHRAE/IESNA 90.1-2001.

I am working on determining an answer regarding a concern a customer has about an EPAct 2005 opportunity in their facility … If a customer has applied for and received the CBTD for the installation and upgrade of their interior lighting system, but did not maximize the CBTD (i.e., the project cost was less than $0.60/sq. ft.), can the customer—if they installed control technology (motion/ambient sensors), which would further reduce the building's energy consumption—claim additional EPAct 2005 funding?

Answer: It sounds like what you are saying is a building owner upgrades, claims the CBTD, then later on, wants to upgrade again and either 1) claim what’s left of the full CBTD not previously claimed, or 2) claim a new CBTD based on the new equipment added. It’s a good question.

Our interpretation is #1 would not be possible. An upgrade is eligible for the Deduction for the year it is placed in service. So if a CBTD was already claimed, that year has come and gone and with it any further eligibility for the new lighting that was installed.

Our interpretation is that #2 might be possible, however. It’s definitely possible if you are upgrading another part of a building that has already gotten the CBTD for a different part of the building. But if you are upgrading the exact same space, but adding occupancy sensors, there would be some real challenges.

The CBTD would be limited to the installed cost of the sensors only, you would have to use the Partial Systems rules (requiring building energy modeling) instead of the Interim Lighting Rule and you would have to reduce the total building energy cost by 16-2/3% using just the occupancy sensors! To make things worse, the baseline building for the energy analysis would be a building that is compliant with ASHRAE/IESNA 90.1-2001, which already requires automatic shutoff. So #2 could be technically possible, but not worth trying.

Does a lighting retrofit need to be done as a one-time project to qualify for the CBTD, or can I retrofit a little each month by the end of the year?

Answer: You could retrofit a little each month and then claim it as a single project as long as everything is being done in the same tax year.

Click the below link to view the guidance for the 'Energy Policy Act Commercial' (EPAC)...
http://www.lightingtaxdeduction.com/PDFs/GuidanceonEPACT-Tax-Incentive-Certification-Letters-rev607.pdf

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