Passed in August 2022, the Inflation Reduction Act (IRA) expanded the Commercial Buildings Tax Deduction (CBTD), increasing the scope of qualifying projects, allowing it to be claimed multiple times and increasing the potential value of the energy-efficiency incentive.

Created by the Energy Policy Act of 2005, the CBTD (Section 179D of the U.S. tax code) offers a financial incentive for commercial building owners to invest in energy-efficient interior lighting, HVAC/hot water systems and building envelope. The incentive takes the form of an accelerated tax deduction, allowing owners to take the deduction in a single year rather than over a period, which helps reduce initial cost. The accelerated deduction value is in dollars per square foot, earned by achieving satisfactory energy reductions compared to a reference building.

Over the years, the CBTD frequently expired and was then reinstated, often retroactively. In 2015, a tax bill recognized the reference building as being one complying with the 2007 version of the ANSI/ASHRAE/IES 90.1 energy standard rather than the 2001 version, making the CBTD harder to gain. In 2021, the Consolidated Appropriations Act made the CBTD permanent, built in an inflation adjustment for the incentive and authorized the Secretary of the Treasury to update the reference building in the future.

The IRA significantly revised the CBTD, making it repeatable and more robust. The previous partial deduction, however, was eliminated. So was the Interim Lighting Rule, which offered a simpler path for lighting retrofit projects. A new one was added.

Qualifying projects: Commercial buildings in the United States and within the scope of 90.1 that install energy-efficient property.

“Property” means normally tax-­depreciable equipment installed as part of interior lighting, HVAC/hot water systems or the building envelope. “Energy-efficient” means it reduces total annual energy and power costs by 25% or more compared to a reference building.

Who claims it: Typically, the owner. In the case of any tax-exempt entities, public or otherwise, however, the IRA authorizes the property’s designer to claim the CBTD.

The reference building: The reference building is one that satisfies the minimum requirements of the 2007 version of 90.1, unless the Secretary of the Treasury has affirmed a later (more stringent) version.

The incentive: The CBTD is $0.50/sq.ft. for achieving a 25% reduction in energy and power costs compared to the reference building. This increases $0.02/sq.ft. for every 1% of energy reduction beyond the 25% baseline, up to a $1/sq.ft. maximum.

There is a bonus if the project satisfies prevailing wage and apprenticeship requirements. The CBTD is $2.50/sq.ft. for 25% savings, increasing $0.10/sq.ft. for every 1% of energy reduction, up to $5/sq.ft. max.

Repeatability: Before, the CBTD could be claimed only once. The IRA allows commercial building owners to claim it every three years and tax-exempt entities every four, as long as they satisfy the requirements in 179D.

Certification: Treasury must define how to calculate and verify energy and power consumption based on the California Nonresidential Alternative Calculation Method Approval Manual. They must also detail how to certify projects, including qualified software for modeling and who can determine compliance. The certification must include an explanation of energy-efficient building features and projected annual energy costs.

Retrofit projects: Last but not least, the CBTD now includes an alternate deduction for retrofit projects that demonstrate a 25% decrease in energy use intensity—measured in BTU—compared to the preretrofit building. A retrofit plan is required. To qualify, the building must have been in service at least 5 years before the plan. The deduction must be taken in the year of final qualifying certification.

Lighting’s role: The Interim Lighting Rule’s elimination made lighting’s part in the CBTD more complex, encouraging it as part of a building systems approach with software­-based energy modeling.

Permanently installed interior lighting—and, arguably, lighting controls—qualify as energy-efficient property. Compared to the 2007 version of 90.1, LED lighting, advanced controls and good design emphasizing energy savings but not compromising lighting quality can make a significant contribution, but this becomes more challenging against later versions of 90.1. 

For retrofits, the reference is the existing building rather than a theoretical standard­-compliant one, which can make the threshold 25% energy reduction easier to achieve. As plug loads are now a significant energy user, the potential to include automatic receptacle control into the lighting control system may contribute additional savings.

The new CBTD takes away a fairly simple and straightforward incentive path for lighting retrofits, but it is more robust and still includes an important role for lighting. Coupled with utility rebates, it can significantly reduce initial cost, which is often a major inhibitor to investing in the most energy-­efficient options.

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