On August 8, 2005 President Bush signed the Energy Policy Act of 2005 (EPAct 2005), which had passed both the Senate and House of Representatives the previous week. Estimated to cost about $14.5 billion over 10 years, EPAct 2005 is the biggest overhaul of national energy policy since 1992. EPAct 1992 required the phased elimination of several popular types of fluorescent and incandescent lamps, and began the deregulation process of the $300 billion electric power industry. EPAct 2005 is considered to be less ambitions on energy’s demand side that its supply provisions supported by the National Electrical Manufacturers Association (NEMA), several of which are of great interest to the lighting community.
EPAct 2005 contains a significant provision that includes a tax deduction of up to $1.80 per square foot for building owners to encourage investment in energy-efficient building systems. This provision, estimated by Congress to cost $243 million and anticipated to stimulate widespread investment, is supported by NEMA and various industry, efficiency, advocacy and environmental organizations.
The Tax Deduction
Under current law the cost of energy-saving investments must be capitalized and depreciated. EPAct 2005, Section 1331, states: “There shall be allowed as a deduction an amount equal to the cost of the energy efficient commercial building property placed in service during the taxable year.” Specifically, EPAct 2005’s Energy Efficient Commercial Building’s Deduction provides one of three possible tax deductions.
The EPAct 2005 provides a tax deduction of up to$1.80/sq. ft. 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) $1.80/sq. ft or 2) the costs incurred or 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 1) interior lighting systems, 2) heating, cooling, ventilation and hot water systems, and 3) building envelope.
In addition, the property must 1) be otherwise depreciable property, 2) located in the United States, 3) 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 (interior lighting, HVAC/hot water, building envelope). Meeting any of the three targets will be another route building owners can take to demonstrate qualification for the deduction.
If a property does not qualify for the $1.80 tax deduction, but one of the qualifying systems meets its designated energy-savings target, then the property will be eligible for a partial tax deduction. Therefore, 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 deduction/system is the lesser of: 1) $0.60/sq. ft or 2) the costs incurred or paid for the energy-efficient system. Costs are defined as any that would normally be part of the capital costs involved in implementing the energy-efficient system and may include labor, materials and engineering design charges.
Interim Rules For Lighting Systems
EPAct 2005 establishes interim rules for lighting systems effective until the Secretary of the Treasury issues the final regulations defining the 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 25-40% lower than the minimum requirements in Table 9.3.1.1-Building Area Method or Table 9.3.1.2-Space-by-Space Method (not including additional interior lighting power allowances) of Standard 90.1-2001. Fore warehouses, the lighting power density must be 50% lower than the minimum requirements of Standard 90.1-2001.
For lighting systems in buildings other than warehouses, the amount of the tax deduction is the lesser of: 1) $0.30-$0.60/sq. ft. or 2) the costs incurred or paid for the energy-efficient lighting systems. For reductions in lighting power density between 25% and 40% the following table indicates the amount of the maximum eligible deduction. Lighting power density reductions of less than 25% are ineligible for any tax deduction.
How To Claim Credit
The tax deduction is allowable in the year in which the energy-efficient property is placed in service. The Treasury Department will be issuing appropriate modifications to its forms to implement the provision. Lighting and building management professionals are encouraged to seek the consultation of a tax expert.
Who Can Claim The Deduction
The tax deduction for private buildings goes to the owner or the person or entity that paid to have the building constructed or renovated.
Window Of Opportunity
EPAct 2005’s energy Efficient Commercial Buildings Deduction applies with respect to property placed in service between January 1, 2006 and December 31, 2007.
Reprint: Lighting Controls Association and Osram Sylvania September 2005 Version 3
