In December 2019, President Donald Trump signed H.R.1865—a tax extender bill reviving $35 billion in expired tax provisions—into law. Along with an extension of the Energy-Efficient Homes Tax Credit, these provisions include an extension of the Commercial Buildings Tax Deduction (CBTD) retroactive to Jan. 1, 2018, and forward to Dec. 31, 2020. This extension breathes new financial incentive into installing energy-efficient interior lighting, HVAC/hot water systems and building envelope features.
The Energy Policy Act of 2005 created the CBTD, which modified federal tax code section 179D to incentivize the installation of energy-efficient building features with an accelerated tax deduction capped at $0.60 to $1.80 per square foot, depending on whether one or all three features were installed. While the CBTD is focused on new construction and renovation, it includes an option for lighting retrofits, called the Interim Lighting Rule.
The CBTD is a useful incentive because it enables building owners to deduct some or all of the cost of installed energy-efficient features as an accelerated deduction (all in a single year), subject to a cap, instead of spread out over a period of years as required by tax law. Whatever amount is left after the cap is then deducted normally. Tax-exempt religious buildings do not qualify. For publicly owned buildings, the party or parties creating the technical specifications for the installed feature can claim the CBTD themselves. To get the CBTD, the installed features must produce a building that satisfies a target energy reduction compared to a baseline—ASHRAE/IES 90.1-2007 (formerly ASHRAE/IES 90.1-2001)—as demonstrated using energy modeling and qualified software.
The disadvantage of the CBTD is that it’s a deduction and not a credit, and the deduction amount itself could be stronger as an incentive. Further, the CBTD has been reauthorized sporadically for limited periods of time since its inception in 2006, often retroactively. This has removed much of the incentive because projects can take a lot of time, and owners have not been certain about the CBTD expiration date. So far, bipartisan efforts to make the CBTD permanent and increase it to $3/sq.ft. have failed in Congress, despite support from organizations such as the American Institute of Architects.
The CBTD’s Interim Lighting Rule, which was intended as a short-term provision, offers a separate incentive for lighting-retrofit projects with a relatively simple compliance path. Owners install energy-efficient interior lighting that reduces lighting power density by 25%–40% relative to the ASHRAE/IES 90.1-2007 energy standard, and thereby qualifies for an accelerated tax deduction of $0.30 to $0.60 per square foot on a sliding scale. To gain the deduction up to $0.60/sq.ft. for warehouses, the lighting must achieve a 50% lower lighting power density.
In addition to a reduction in lighting power, the owner must also install bilevel switching controls in all occupancies except hotel and motel guest rooms, storerooms, restrooms, public lobbies and garages. This could be A/B switching or stepped or continuous dimming. Additionally, the project must satisfy the minimum light-level requirements in the ninth edition of the Illuminating Engineering Society’s Lighting Handbook.
Power densities for interior lighting systems roughly designed to ASHRAE/IES 90.1-2013 and later suggest these savings are possible, if challenging. Generally, qualifying would involve upgrading to highly efficient LED replacement lamps or luminaires. Many luminaires offer dimming at a negligible cost premium, making the bilevel switching requirement relatively easy to satisfy compared to traditional lighting.
After installation, the project must be certified by a contractor or engineer licensed in the same jurisdiction as the project building and not in the owner’s direct employ. This party states in writing that the project achieves the necessary energy savings, features bilevel switching and realizes appropriate light levels. Any software can be used to demonstrate the savings. The certification letter must state the certifier’s qualifications and that the project was field-inspected in accordance with the “Energy Savings Modeling and Inspection Guidelines for Commercial Building Federal Tax Deduction.” Finally, the letter must list all energy-efficient lighting components, explain these features and include the new lighting power density.
The CBTD has ridden a rough road in terms of availability, which has limited its effectiveness. Nonetheless, it continues to offer a financial incentive for building owners to invest in energy-efficient building features, notably interior lighting. With today’s LED technology, satisfying the requirements of the Interim Lighting Rule is possible and may result in retrofit opportunities for savvy electrical contractors.