White Paper - Commercial Buildings Deduction

Commercial Buildings Deduction Update:

Automatic Shutoff Controls Not Required for All Interim Lighting Rules Retrofits
NEMA Recognizes Definition of Bi-Level Switching
Congress Considering Extension of Commercial Buildings Deduction

By Craig DiLouie, Lighting Controls Association

Published September 2006

The Energy Policy Act of 2005 (EPAct 2005) created a special tax deduction provision encouraging building owners to adopt energy-efficient building systems.

The Commercial Buildings Deduction allows owners to deduct the full cost of energy-efficient building systems in the year they are placed in service rather than depreciating their cost over time.

Click here to learn more about the Commercial Buildings Deduction as it was originally described in EPAct 2005. Click here to learn more about the IRS guidelines for implementing the Deduction. This second whitepaper was updated August 21 to clarify a few points.

Automatic Shutoff Controls Not Required for All Interim Lighting Rules Retrofits

The Interim Lighting Rules enable building owners to deduct the full cost of new interior lighting, capped at $0.30-$0.60/sq.ft., for exceeding ASHRAE 90.1-2001’s lighting power density (LPD) requirements by 25-40% and meeting other requirements.

These other requirements include:

Meet mandatory controls and circuiting requirements of Standard 90.1-2001
Bi-level switching required for most occupancies, with few exceptions
Meet minimum IESNA-recommended light levels

There have been questions about whether building owners must meet the mandatory controls and circuiting requirements of Standard 90.1-2001 in all projects seeking to qualify for the Deduction under the Interim Lighting Rules, or whether exceptions would apply, such as in the case of retrofits. NEMA’s position is that the decision is determined by following the logic of Standard 90.1-2001 (see Section 4.1.2.2.5, Lighting Alterations).

For retrofits, this means to qualify for the Deduction under the Interim Lighting Rules, building owners must meet Standard 90.1-2001’s Section 9.2 mandatory controls requirements only if new controls devices are used as direct replacements of existing controls devices and 50% or more of the light fixtures are replaced.

Bi-level switching, however, is still required for all projects seeking to qualify for the Commercial Buildings Deduction under the Interim Lighting Rules, including retrofits.

NEMA Recognizes Definition of Bi-Level Switching

There has been a little confusion about what constitutes bi-level switching. Generally, bi-level switching is manual or automatic control (or a combination of the two) that provides at least two levels of lighting power in a space (not including OFF). If switching is used as the control instead of dimming, this can be translated simply: two switches controlling two light sources (as long as both are "permanently installed"). The following applies:

Different lighting layers, if permanently installed (equipment that is fixed in place and not portable or movable, and therefore included in the total installed interior lighting power) and switched separately, would comply: For example, in an office space, permanently installed undercabinet task lights and overhead lights, if separately switched, would constitute bi-level switching
Continuous dimming, step-dimming or switching can be used
A/B switching within same lighting layer can be based on alternate ballasts or alternate fixtures
Control input can be manual switch, timer, photosensor, occupancy sensor, scheduling system or any other type of control that enacts switching

Congress Considering Extension of Commercial Buildings Deduction

The effective window for the Deduction, as described in EPAct 2005, was 2006-2007. Congress is now considering eight bills that seek to extend coverage through 2010 or 2014. Some of these bills also seek to expand the deduction from $1.80/sq.ft. to $2.25/sq.ft. (Complete Deduction), and $0.60/sq.ft. to $0.75/sq.ft. (Partial Deduction).

Extending the window for the Deduction will increase its effectiveness. As stated by Senator Max Baucus (D-MT and the top Democrat on the Senate Finance Committee, where the Senate bills were referred after being read): “The 2005 energy bill put us on the right track … Unfortunately, these provisions are either short-term or capped at insufficient levels …”

Strengthening the Deduction by raising the cap on the maximum deduction that can be claimed will also increase its effectiveness towards achieving national energy goals. As stated by Congressman Brian Baird (D-WA): “Our bill provides incentives to build energy efficient commercial buildings. This forward-thinking investment is good for our environment and good for our economy …”

While none of these bills are law, it is useful to review legislation being considered in both the Senate and the House of Representatives to see how the Commercial Buildings Deduction may be changed in the future.

As for likelihood of passage of any of these bills, it’s difficult to speculate. Most of the bills are sponsored by Democrats, which are a minority in both houses of Congress, but some have bipartisan sponsorship. Even with bipartisan sponsorship, bills are often changed before gaining enough support for passage, and many see defeat in committee before ever having the opportunity of a full vote.

NEMA and the other members of the Commercial Building Tax Deduction have been lobbying Congress for such extension language in new energy legislation.

SENATE

U.S. Senators have introduced six bills that are all now in committee, which are shown below:

S.2398. Energy Competitiveness Act of 2006

Summary: Extends effective window of Commercial Buildings Deduction from 2006-2007 to 2006-2010.

Sponsor: Senator Max Baucus (D-MT)

Status: Read twice and referred to Finance Committee on 3/9/2006

Legislation: Section 221. Extension of Energy Efficient Commercial Buildings Deduction, “Section 179D(h) of the Internal Revenue Code of 1986 (relating to termination) is amended by striking ‘2007’ and inserting ‘2010.’”

S.2401. The Alternative Energy Extender Act

Summary: Extends effective window of Commercial Buildings Deduction from 2006-2007 to 2006-2010.

Sponsor: Senator Chuck Grassley (R-IA)

Cosponsors: Senators Max Baucus (D-MT), Richard Durbin (D-IL), Blanche Lincoln (D-AR), Ken Salazar (D-CO), Mark Dayton (D-MN), Michael Enzi (R-WY), Benjamin Nelson (D-NE), Gordon Smith (R-OR)

Status: Read twice and referred to Finance Committee on 3/13/2006

Legislation: Section 301. Extension of Energy Efficient Commercial Buildings Deduction, “Section 179D(h) of the Internal Revenue Code of 1986 (relating to termination) is amended by striking ‘2007’ and inserting ‘2010.’”

S.2571. Bold Energy Act of 2006

Sponsor: Senator Kent Conrad (D-ND)

Cosponsor: Senator Mark Dayton (D-MN), Byron Dorgan (D-ND)

Status: Read twice and referred to Finance Committee on 4/6/2006

Legislation: Section 603. Modification and Extension of Energy Efficient Commercial Buildings Deduction, “(a) Increase in Credit Amount: (1) In General – Subparagraph (A) of section 179D(b)(1) of the Internal Revenue Code of 1986 is amended by striking ‘$1.80’ and inserting ‘$2.25.’ (2) Partial Allowance – Subparagraph (A) of section 179D(1) of such Code is amended (A) by striking ‘$.60’ and inserting ‘$.75,’ and (B) by striking ‘$1.80’ and inserting ‘$2.25.’ (b) Extension – Section 179D(g) of the Internal Revenue Code of 1986 is amended by striking ‘ December 31, 2007’ and inserting ‘ December 31, 2010.’ (c) Effective Date – The amendments made by this section shall apply to property placed in service after December 31, 2006.”

S.2829. Clean Edge Act of 2006

Summary: Extends effective window of Commercial Buildings Deduction from 2006-2007 to 2006-2014.

Sponsor: Senator Maria Cantwell, D-WA

Cosponsors: Senators Joe Biden (D-DE), Barbara Boxer (D-CA), Thomas Carper (D-DE), Mark Dayton (D-MN), Byron Dorgan (D-ND), Dianne Feinstein (D-CA), Tim Johnson (D-SD), Patrick Leahy (D-VT), Joe Lieberman (D-CT), Barbara Mikulski (D-MD), Harry Reid (D-NV), Chuck Schumer (D-NY), Jeff Bingaman (D-NM), Robert Byrd (D-WV), Hillary Clinton (D-NY), Christopher Dodd (D-CT), Richard Durbin (D-IL), Tom Harkin (D-IA), John Kerry (D-MA), Carl Levin (D-MI), Robert Menendez (D-NJ), Jack Reed (D-RI), Ken Salazar (D-CO), Debbie Stabenow (D-MI)

Status: Read twice and referred to the Finance Committee on 5/17/2006

Legislation: Section 331. Extension of Energy Efficient Commercial Buildings Deduction, “Section 179D(h) of the Internal Revenue Code of 1986 (relating to termination) is amended by striking ‘2007’ and inserting ‘2014.’”

S.2993. Strategic Energy Fund Act of 2006

Summary: Extends effective window of Commercial Buildings Deduction from 2006-2007 to 2006-2014.

Sponsor: Senator Hillary Clinton (D-NY)

Status: Read twice and referred to the Finance Committee on 5/23/2006

Legislation: Section 151. Extension of Energy Efficient Commercial Buildings Deduction, “Section 179D(h) of the Internal Revenue Code of 1986 (relating to termination) is amended by striking ‘2007’ and inserting ‘2014.’”

S.3628. Extend the Energy Efficiency Incentives Act of 2006

Summary: Extends maximum amount of Complete Deduction from $1.80/sq.ft. to $2.25/sq.ft. and Partial Deduction from $0.60/sq.ft. to $0.75/sq.ft.; extends effective window of Commercial Buildings Deduction from 2006-2007 to 2006-2011/2013 (deduction will not apply to projects certified after 12/31/11 or placed in service after 12/31/13. Further requires computer software to automatically generate features, energy use, and energy and power consumption costs of a reference building that meets Standard 90.1-2001, and compares these features to the proposed building or system. Finally, partial allowance savings targets will be based on prescriptive criteria that can be modeled explicitly. These amendments apply to property placed in service in taxable years beginning after the date of the enactment of this law.

Sponsor: Senator Olympia Snowe (R-ME)

Cosponsors: Senators Dianne Feinstein (D-CA), John Kerry (D-MA)

Status: Read twice and referred to Finance Committee on 6/29/2006

Legislation: Section 202. Extension and Modification of Deduction for Energy Efficient Commercial Buildings, “(a) Extension – Subsection (h) of section 179D (relating to termination) is amended to read as follows: ‘(h) Termination – This section shall not apply with respect to property—(1) which is certified under subsection (d)(6) after December 31, 2011, or (2) which is placed in service after December 31, 2013.’ (b) Increase in Maximum Amount of Deduction – (1) In General – Subparagraph (A) of section 179D(d) is amended—(A) by striking ‘$.60’ and inserting ‘$0.75,’ and (B) by striking ‘$1.80’ and inserting ‘$2.25.’ (c) Modifications to Certain Special Rules – (1) Requirements for Computer Software Used in Calculating Energy and Power Consumption Costs – Computer software used in preparing a calculation under section 179D(d)(2) of the Internal Revenue Code of 1986 shall automatically—(A) generate the features, energy use and energy and power consumption costs of a reference building that meets Standard 90.1-2001 (as defined under section 179D(c)(2) of such Code), and (B) compare such features, energy use and consumption costs to the features, energy use and consumption costs of the building or system with respect to which the calculation is being made. (2) Targets for Partial Allowance of Credit – The targets established by the Secretary of Treasury under section 179D(b)(1)(B) of the Internal Revenue Code of 1986 shall be based on prescriptive criteria that can be modeled explicitly. (d) Effective Date – The amendments made by this section shall apply to property placed in service in taxable years beginning after the date of the enactment of this Act.”

HOUSE OF REPRESENTATIVES

Members of the U.S. House of Representatives have introduced two bills that are now in committee, which are shown below:

HR5331. Bold Energy Act of 2006

Sponsor: Representative Earl Pomeroy (D-ND)

Cosponsor: Representative Marcy Kaptur (D-OH)

Status: Referred to the Energy and Air Quality Subcommittee on 6/5/2006

Legislation: Section 603. Modification and Extension of Energy Efficient Commercial Buildings Deduction, “(a) Increase in Credit Amount – (1) In General – Subparagraph (A) of section 179D(b)(1) of the Internal Revenue Code of 1986 is amended by striking ‘$1.80’ and inserting ‘$2.25.’ (2) Partial Allowance – Subparagraph (A) of section 179D(1) of such Code is amended—(A) by striking ‘$.60’ and inserting ‘$.75,’ and (B) by striking ‘$1.80’ and inserting ‘$2.25.’ (b) Extension – Section 179D(g) of the Internal Revenue Code of 1986 is amended by striking ‘December 31, 2007’ and inserting ‘December 31, 2010.’ (c) Effective Date – The amendments made by this section shall apply to property placed in service after December 31, 2006.”

HR5809. Energy Efficient Buildings Act of 2006

Sponsor: Representative Melissa Hart (R-PA)

Cosponsor: Representative Brian Baird (D-WA)

Status: Referred to the House Ways and Means Committee on 7/17/2006

Legislation: Commercial Buildings Deduction, “(a) Increase in Amount of Deduction – Section 179D of the Internal Revenue Code of 1986 (relating to energy efficient commercial buildings deduction) is amended—(1) in subsection (b)(a)(A) by striking ‘$1.80’ and inserting ‘$2.25,’ and (2) in subsection (d)(1)(A) by striking ‘$.60 for $1.80’ and inserting ‘$.75 for $2.25.’ (b) Extension – Subsection (h) of section 179D of such Code (relating to termination) is amended by striking ‘December 31, 2007’ and inserting ‘December 31, 2010.’ (c) Effective Data –The amendments made by this section shall apply to property placed in service in taxable years beginning after December 31, 2006.”

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