In December 2015, President Obama signed a new tax bill into law, extending the Commercial Buildings Tax Deduction (CBTD, or Section 179D of the tax code) for two years, while raising the bar for efficiency. Created by the Energy Policy Act of 2005, the CBTD offers a financial incentive to encourage investment in energy-efficient building systems and envelopes.
After multiple extensions, the deduction expired at the end of 2014. The new tax law retroactively extends it through 2015 and then further to Dec. 31, 2016. This allows qualifying projects completed in 2015 to receive the deduction while incentivizing 2016 projects.
The law also raises the bar for efficiency. Currently, the CBTD is based on achieving energy savings compared to a reference standard (ASHRAE/IES 90.1, a model energy code). Qualifying projects placed in service after Dec. 31, 2015, must satisfy a later, tougher version of 90.1.
The CBTD offers building owners an accelerated tax deduction as incentive to install energy-efficient interior lighting; heating, ventilating and air conditioning (HVAC)/hot water systems; and building envelope. Instead of taking the deduction over a period of years as tax law requires, the entire deduction can be taken in a single year—in the case of the CBTD, subject to a cap.
Specifically, building owners that install all three systems and achieve target energy savings can earn up to $1.80 per square foot. Owners that invest in any individual energy-efficient building feature can earn up to $0.60 per square foot. Applicable mainly to new construction and renovation, these paths require energy modeling using qualified software that compares the energy performance of a proposed building versus a reference building that satisfies the minimum requirements of ASHRAE/IES 90.1 2001. The new tax law updates the reference standard to ASHRAE/IES 90.1 2007 for projects placed in service in 2016, so achieving the CBTD is more difficult.
Another path is the Interim Lighting Rule. Initially intended to be temporary, it continues to endure. This rule provides an accelerated deduction that covers the cost of new interior lighting. It is capped at $0.30 to $0.60 per square foot. The maximum amount of accelerated deduction is based on achieving a lighting power density that is 25–40 percent lower than ASHRAE/IES 90.1 2001 (90.1 2007 after Dec. 31, 2015). Warehouses are an exception; the new lighting must reduce power density by at least 50 percent to qualify for a deduction capped at $0.60 per square foot.
Besides a power-density reduction, projects qualifying under the Interim Lighting Rule must also have bilevel switching installed in occupancies except for hotel and motel guest rooms, store rooms, restrooms, public lobbies and garages. The bilevel switching could be A/B switching or step or continuous dimming. In addition, the project must satisfy the minimum light-level requirements in the ninth edition of the IES Lighting Handbook.
As required in IRS Notice 2008-40, for the owner to claim the CBTD, the project must be certified by a qualified party—that is, a properly licensed contractor or engineer in the jurisdiction in which the building is located and who is not an employee of the building owner. This party must demonstrate in writing they have the qualifications to do the certification.
The project certification must include a statement that the interior lighting achieves a suitable reduction in power density and satisfies the mandatory requirements for bilevel switching and light levels. Any software can be used to detail the savings. The certification letter must also state the project was performed by a qualified individual and field-inspected in accordance with the Energy Savings Modeling and Inspection Guidelines for Commercial Building Federal Tax Deduction. Finally, it must list all energy-efficient lighting components, explain these features and include the projected lighting power density.
Whatever path is taken to qualify for the CBTD, the cost of the new lighting system can be deducted in a single tax year, subject to a cap. Any leftover costs are deducted normally. If the building is publicly owned, IRS Notice 2008-40 states that the party or parties that created the technical specifications for the installation of the energy-efficient property can claim the CBTD. The CBTD cannot be applied to houses of worship because religious organizations are exempt from taxation.
The CBTD has traveled a rocky road. It took years for the final pieces to fall into place allowing it to be claimed, and most of the extensions have been short-lived, resulting in uncertainty. With the reference building being based on a stricter version of ASHRAE/IES 90.1, it will be more difficult to achieve. The good news, however, is that the CBTD is alive and kicking, offers a substantial incentive to reduce the cost of new lighting, and can now be applied to projects placed in service in 2015 and 2016.