What energy standard is the reference standard for EPAct 2005?
EPAct 2005 provides an opportunity for property owners to earn Federal tax deductions for new building or retrofit installations that beat the ASHRAE/IESNA 90.1-2001 energy standard as in effect on April 2, 2003, including addenda 90.1a-2003, 90.1b-2002, 90.1c-2002, 90.1d-2002 and 90.1k-2002.  (None of the addenda apply to .)  In the case of a retrofit, you are not trying to beat the existing system.  You must beat the watts per square foot allowances in the ASHRAE/IESNA 90.1-2001 standard.

Are there any other standards that apply?
To qualify for the EPAct 2005 tax deduction, installations must meet IESNA recommended minimum design light levels. It’s not just about saving energy without regard to light levels.

Any installation would also have to satisfy any local and state regulations, codes or standards that apply in the jurisdiction where the building is located. 

I heard that the ASHRAE/IESNA 90.1-2001 standard was amended to adopt the power densities in the 90-1-2004 standard, which are stricter.  How is this addressed by the Commercial Buildings tax deduction program? 
It is true that Addendum g to the 90-1-2001 standard changed the power densities (watts/sq. ft.) to values that are now adopted in the 90.1-2004 standard, but the Commercial Building Tax Deduction provision recognizes the version of the 90.1-2001 standard that was in effect on April 2, 2003.  This means the original published power densities in Tables 9.3.1.1 and 9.3.1.2 are in effect as far as the tax deduction provision is concerned and not the vales in Addendum g and the 2004 version of 90.1.  However, be sure to comply with all local and state codes, in addition to the applicable sections of the 90.1-2001 standard, if your project triggers the application of these local and state codes.  (Source:  www.taxdeduction.org)
 

If a building were designed to meet ASHRAE/IESNA 90.1 -2004 it would it meet EPAct 2005 standards? 
Not necessarily.  The power densities are almost low enough to satisfy the minimum saving targets required by the Interim Lighting Rules, but the controls requirements go beyond those of 90.1-2004, specifically the requirement for bi-level switching. 

ASHRAE/IESNA 90.1-2001 allows tradeoffs between building types and space types depending on method and it also allows additional interior power allowances if using the Space-by-Space Method.  Are these still the case when applying the 90.1-2001 standard to the Commercial Buildings tax deduction provision?
The Commercial Buildings tax deduction provision states that the deduction can be earned based on reducing power density (watts/sq. ft.) below the minimum requirements of the 90.1-2001 standard, not including additional interior power allowances.  However, the designer can engage in tradeoffs between building types (Building Area method) and space types (Space-by-Space Method) as long as the sum of the power does not exceed the interior power allowance.  (Source:  www.taxdeduction.org)

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What systems within a building are covered by EPAct 2005?
Interior , HVAC/hot water and building envelope are the three systems covered by the legislation.  Any one system or any combination of systems can be designed or retrofitted to meet the standards set by EPAct 2005.  Exterior systems are not included.

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5.   Are these covered?

Is exterior covered by EPAct 2005? 
No.  The tax deduction is for interior system of a building.

Is a parking garage considered an interior space? 
Yes.  IRS Notice 2008-40, Section 6 specifically includes garages. 

Is a covered canopy such as a bank drive though considered interior or exterior? 
Exterior, so it would not qualify. 

Can you just change the lamps and earn a tax deduction allowance?
No.  All energy saving solutions must be capital expenditures that would normally be depreciated over time.  At a minimum, you would need to replace both lamps and ballasts for it to be considered a capital expenditure.  New luminaires (fixtures) would be considered a capital expenditure. 

Do retrofits qualify for a Commercial Building Tax Deduction or must it be a new construction or renovation project?
Lighting retrofits can potentially qualify for a Commercial Building Tax Deduction.  (Source:  www.taxdeduction.org)

If a building is used as both a warehouse and manufacturing facility, ASHRAE/IESNA 90.1 appears to allow the building area method to be used separately for the warehouse portion and the manufacturing facility portion.  Is it then the case that the tax deduction would be calculated separately for both portions if the building area method is used – 50% savings and $0.60/sq. ft. for the warehouse and 25-40% savings and $0.30-$0.60/sq. ft. for the manufacturing facility?
The building portions could be addressed separately.  (Source:  www.taxdeduction.org)

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6.   Tax Deduction:  Who, How Much, When, How 

What is the tax deduction allowance that can be earned?
If all three systems are designed or retrofitted to meet EPAct 2005, then the maximum tax deduction allowance is $1.80/sq. foot.  If only one of the three systems is designed or retrofitted to meet EPAct 2005, then the maximum tax deduction allowance is $0.60/sq. foot.  If following the Interim Rules for , a sliding scale applies.  If you save as little as 25%, you can qualify for a $0.30/sq. foot deduction; you max out at a 40% reduction earning $0.60/sq. foot.  In all cases, you must meet all requirements to qualify.  The exception is warehouses.  Warehouses must beat the watts per square foot allowances by 50% and, if they do and meet all other requirements, then they can qualify for $0.60/sq. foot. 

Portions of a building can be designed or retrofitted to meet EPAct 2005 and the associated square footage areas considered.   For example, it would be possible for the open office space in a building to meet EPAct 2005, but not the private offices.  The deduction could be claimed for just the area that meets EPAct 2005 requirements. 

Who gets the tax deduction?
The property owner gets the deduction for the depreciable property.  If the owner is a public entity (e.g. public school), the designer of the system can claim the deduction.  (The IRS defined “designer” and provided guidelines in IRS Notice 2008-40, Section 3.)  A tenant may be eligible for the deduction if, for tax purposes, they are considered to be the building or system owner.  In the case of , whoever carries the system as an asset on their books is most likely to be considered the “owner” for tax purposes.

If my project qualifies for the maximum of $0.60/sq. foot, can I take the full deduction even if the cost is less?
No.  The maximum gross deduction for interior systems is $0.60/sq. ft. unless the cost is less.  For example, if the new or renovated system is used in an area of 100,000 square feet and qualifies for the maximum deduction of $0.60/sq. ft., then the gross deduction would be $60,000 unless the system cost less than $60,000.  If it only costs $50,000, then $50,000 is the maximum deduction.  If the system costs more than $60,000, the gross deduction would be $60,000 in the year in which the system goes into service and the balance would be depreciated in the normal fashion.  The costs include the design, material and labor required to complete the project. 

When can I take the deduction?
The deduction may be taken in the year in which the system or building is put in service – ready to use.

Is it a tax deduction or a tax credit? 
The EPAct 2005 commercial program provides for tax deductions, not tax credits.  Owners are encouraged to seek the advice of tax consultants. 

What is the difference between a tax deduction and a tax credit? 
The EPAct 2005 commercial program provides for tax deductions, not tax credits.  A tax deduction is a cost subtracted from adjusted gross income when calculating taxable income; therefore, tax liability is not reduced dollar for dollar, but in proportion to the taxpayer’s tax bracket.  Many projects result in tax deductions. 

Many projects result in tax deductions.  Under current law, the cost of the new must be capitalized and depreciated over time.  Under the rules for in the Commercial Building Tax Deduction program, the owner can write off the entire expense of the new , capped at $0.60/sq. ft. or the cost of the system if it is less, in the taxable year that the new is placed into service.  This is an accelerated tax deduction. 

A tax credit is a direct dollar-for-dollar reduction of tax liability. 
(Source:  www.taxdeduction.org)

How does a taxpayer claim the Commercial Building Tax Deduction?
The taxpayer should always consult his/her own tax specialist.  The IRS has not provided a special form.  The IRS instructions for business forms (Form 1120 for corporations, Form 1120-S for S corporations and Form 1065 for partnerships) indicate that the taxpayer should include the amount of the deduction in the amount entered in the “Other deductions” line of the tax return.  A statement listing the types and amounts of “other deductions” should be attached to the return.  In addition, it is important that a taxpayer obtain and retain the necessary certifications and documentation to claim the deduction.  The tax payer does not need to submit the certification documents with his/her tax return.  See IRS Notice 2006-52 for these requirements.  (Source:  www.taxdeduction.org)

Another option is using IRS Form 4562, Depreciation & Amortization, Part I Special Depreciation Allowance & Other Depreciation. 

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7.   Determining the Watts/Sq. Ft. Allowance 

I understand there is more than one way to determine the energy allowance.  What are they? 
The standards are based on power density, watts/sq. foot.  The ASHRAE/IESNA 90.1-2001 standard provides for two different methods for determining the allowance:  Building Area Method or Space-by-Space Method.  The Building Area Method is the easiest to use, but the watts/sq. foot allowances are lower.  The Space-by-Space method requires a more detailed analysis of how the space is used in a building, but in general, it allows higher watts/sq. ft allowances than the Building Area Method.  For example, if you have an office building and use the Building Area Method, there is one watt’s/sq. ft. allowance for the entire building regardless of how the spaces are specifically used.  If you use the Space-by-Space method and have open offices and enclosed offices, then the open offices receive one watts/sq. ft. allowance and the enclosed offices receive a different watts/sq. ft. allowance.  Remember, to qualify for the tax deduction, you must beat the 90.1-2001 allowance. 

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Do you have to use a software program to determine if a building or system complies with EPAct 2005?
When dealing with all three building systems or following the IRS partial deduction rule, an approved software program must be used to demonstrate compliance.  The approved software is listed on this website:  http://www1.eere.energy.gov/buildings/qualified_software.html
 

In the case of the interim rules for interior , use of an approved software program is not required.  A simple spread sheet can be used.  This was clarified by the IRS in Notice 2008-40, Section 5.

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9.   Interim Rules for Lighting 

What are the interim rules for ?
The interim rules provide a sliding scale for .   Lighting can qualify for tax deductions if it beats ASHRAE/IESNA 90-1-2001 by 25% ($0.30/sq. ft) up to 40% or greater ($0.60/sq.ft.)

Sliding Scale for Lighting:

% of LPD reduction beyond ASHAE/IES 90.1 2001 (%)	<25	25	26	27	28	29	30	31	32
Amount of Eligible Tax Deduction/sq.ft ($)	0.00	0.30	0.32	0.34	0.36	0.38	0.40	0.42	0.44

% of LPD reduction beyond ASHAE/IES 90.1 2001 (%)	33	34	35	36	37	38	39	40	>40
Amount of Eligible Tax Deduction/sq.ft ($)	0.46	0.48	0.50	0.52	0.54	0.56	0.58	0.60	0.60

Example:  Beat ASHRAE/IESNA by 33%, get $0.46/sq. ft.

There is an exception to the sliding scale for :  warehouses must beat 90.1-2001 interior allowance by 50%.  If they do and meet all other requirements, then the $0.60/sq. ft. would apply.  NEMA recommends that the interim rules be used. 

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10.   IRS Rules for Partial Deductions 

I understand that the IRS has issued “permanent” rules for partial deductions.  What are they?
An entire building, new or renovated, has to be compared to a reference building of the same type in the same climate, using approved software.  The whole building has to be modeled and a baseline energy usage calculated as if it were following ASHREA/IESNA 90.1-2001 power density allowances.  The total power allowance is calculated based on three systems:  interior , HVAC/hot water and building envelope.  The target for the whole building is a 50% savings.  Any one of the three systems must save 1/3 of the 50%, or 16-2/3% or more of the total building power allowance.  The bi-level switching requirement appears to have been dropped from the “permanent” rules for partial deductions.  Note that if these rules are followed, approved software must be used.  In the case of , there are two options for taking a partial deduction:  the IRS “permanent” rules for partial deduction or the Interim Rules with the sliding scale. 
 

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Are controls required?
Lighting controls are also addressed by the EPAct 2005 tax deduction provisions, both directly and through the ASHARE/IESNA 90.1-2001 standard.    ASHRAE/IESNA 90.1-2001 does require that new buildings larger than 5000 sq. ft. have automatic shut-off of in all spaces as well as having controls readily accessible in the space.  A space is defined as an area enclosed by four or more floor-to-ceiling walls.  Per ASHRAE/IESNA 90.1-2001, in retrofits, you do not have to modify the exiting controls, but if you replace more than 50% of the luminaires (fixtures) or change the controls, then the controls have to meet the ASHRAE/IESNA 90.1 “space controls” requirements.  In addition to the ASHRAE/IESNA 90.1-2001 control requirements, EPACT 2005 requires that bi-level switching be used when following the Interim Rules.

What is the bi-level switching requirement?
Switches that simply turn luminaires “on” and “off” do not count as bi-level switching.  Bi-level switching is defined as manual or automatic control, or a combination of both, that provides two levels of power in a space, not including off.  A space is defined as an area enclosed by four or more floor-to-ceiling walls.  Bi-level switching can be as simple as a split-ballasting system able to control ½ of the lamps or fixtures, bi-level ballasts, multiple ballasts, dimming ballasts, manual switches or dimmers or photo sensors and other strategies. 

The exceptions to the bi-level switch requirement are hotel/motel guest rooms, store rooms, restrooms, public lobbies and garages.  Garages were added by IRS Notice 2008-40. 

Remember that you must also comply with local codes.  Some state energy codes define what can be considered bi-level switching, so be sure and check the local codes to make sure you are in compliance.

Do occupancy sensors satisfy the bi-level switching requirement? 
Use of an occupancy sensor to simply turn all of the luminaires (fixtures) in a space off does not satisfy the bi-level switching requirement.  If an occupancy sensor is used to only control some of the luminaires in a space or some of the lamps in a luminaire so that some level of is maintained when an occupancy sensor turns off lights, then it may qualify as providing bi-level switching. 

Do dimming systems meet the requirements for bi-level switching?
A dimming system that provides at least two levels of on in addition to off may qualify. 

Dimming is not listed in the mandatory controls provisions of ASHARE/IESNA Standard 90.1-2001.  Can dimming contribute to the power density savings needed to qualify for the Commercial Building Tax Deduction? 
Dimming strategies such as load shedding, daylight harvesting or adaptive compensation are not recognized as methods to reduce power density (watts/sq. ft.) using the conventional methods specified in the ASHRAE/IESNA 90-1 standard, but can be when using the energy cost budget method.  The energy cost budget method requires computer modeling.  In addition, dimming may be considered as satisfactory for the bi-level switching requirement.  (Source:  www.taxdeduction.org)

If a building already has bi-level switching, can its cost be claimed for the purposes of the Commercial Building Tax Deduction? 
If any of the prerequisites for the Interim Lighting Rules – such as bi-level switching – are already in place in an existing building, then that makes the job of qualifying for the Commercial Building Tax Deduction easier, but any cost incurred before January 1, 2006 will not count toward earning the deduction.  (Source:  www.taxdeduction.org)

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12.   Determining the Wattage of the Proposed System 

How do you determine the wattage of the system?
When counting the wattage, screw base CFLs can not be used to achieve the energy saving goal.  The maximum luminaire wattage must be used.  For example, if you are using an incandescent downlight with a maximum rating of 150W, you must use 150W when counting the wattage even if you are using a lower wattage CFL or halogen lamp. 

Line voltage track is counted at 30W per linear foot.  For low voltage track , the wattage rating of the transformer is used. 

If using fluorescent luminaires, you must use the maximum wattage of the ballast.  If the ballast in the luminaire can operate a range of lamp wattages and the maximum wattage label in the luminaire list a maximum wattage lamp, you must count the wattage of the system based on using the maximum wattage lamp.  This is not intended to stop you from using lower wattage lamps. 

The industry requested guidance from ASHRAE, which responded:

The intent of section 9.1.4 (b) in  ASHRAE/IESNA 90.1-2004 is to ensure that the calculation of wattage for compliance includes ballast and/or transformer energy for the equipment that is to be installed and used. If the actual equipment to be installed and used is not known or specified, than the maximum lamp/auxiliary combination becomes the basis for wattage calculation. However, it was never the intent of the requirement that installed lamp/auxiliary combinations drawing lower wattage than the maximum should be penalized at the maximum value. Therefore, similar to the language included for screw-based socket luminaires in 9.1.4 (a), the ‘maximum labeled wattage’ (lamp/auxiliary combination for the maximum lamp wattage allowed by the label) of a luminaire could be used for wattage calculation of luminaires with permanently installed or remote ballasts or transformers.

Note1: a proposed change to the standard for the 2007 version will add this additional language to 9.1.4 (b).

Note2: This informal interpretation also applies to the 1999 and 2001 versions of the Standard.

This indicates that the actual wattage of fluorescent systems using energy-saving T8 lamps can be used in energy calculations, not the maximum lamp-ballast wattage, for the purposes of achieving efficiency levels for the purposes of qualifying for the CBTD.  Remember, the complete bill of material used in a project must be supplied to the certifier so he/she can confirm that it is installed.  Some may specifically look for a label, so to overcome this issue, a permanent label could be made specifying the wattage of the lamp to be used and installed inside the luminaire/fixture so that the certifier can see the label and maintenance will see the label in the future. 

If new luminaires are being used, ask if the luminaire manufacturer will install a special permanent label stating the wattage of the lamp specified for the job.  We have been told that luminaire manufacturers have done this when the order was for a large quantity of luminaires.

Note:  when a ballast, transformer or LED driver is a component of the system, you must include the wattage consumed by the ballast, transformer or LED driver in addition to the lamp wattage to determine the total system wattage.  Most ballast manufacturers publish system wattages including both lamps and ballasts.

Caution.  If the lamp specifications are unclear or it is unknown what will ultimately be installed, then the maximum wattage lamp must be used to determine the system wattage. 

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13.   Certification Requirement:  Who, How, What 

I have been told that a project must be certified in order for the taxpayer to claim a deduction.  Is this correct?
Yes, a qualified individual must certify a project before the taxpayer can claim a deduction.

Who determines if my project is in compliance with EPAct 2005? 
All installations must be certified by a qualified individual.  A qualified individual is one who “(1) is not related to the taxpayer claiming the deduction” (not an employee of the taxpayer), “(2) is an engineer or contractor that is properly licensed as a professional engineer or contractor in the jurisdiction where the building is located, and (3) has represented in writing to the taxpayer that he/she has the requisites qualifications to provide the certification….”   You may find certifiers listed at www.nlb.org.

What information must the certifier supply to the tax payer?
The certifier should include the following:

• Name, address & telephone number of the qualified individual
• Address of the building
• Prescribed statement for energy efficient property that satisfies the requirements of the rules
• Statement that reduced energy has been determines under the IRS rules
• Statement that field inspections using the modeling and inspection guidelines written by the National Renewable Energy Laboratory (NREL) were conducted and that the building has, or will, meet the energy saving targets contained in the plans and specifications
• Statement that the building owner has received an explanation of the energy efficiency features of the building and projected annual energy costs
• Statement that the qualified computer software was used, if applicable
• List of components of the interior system installed in the building
• Prescribed statement declaring the certifier believes the facts presented to be true, correct and complete

For details on the requirements, please refer to IRS Notices 2006-52 and 2008-40 at http://www.irs.gov/pub/irs-drop/n-06-52.pdf and http://www.irs.gov/pub/irs-drop/n-08-40.pdf, respectively. 

Is there a specific form that the certifier has to use when certifying the building?
There are no specific forms, but NEMA (National Electrical Manufacturers Association) provides guidance was to what to say and even provides a sample certification document to use when the system is the basis for the tax deduction and the Interim Rules for were followed.  Go to http://www.nema.org/gov/efficientbuildings for this information.  These guidelines are also available on OSI’s EPAct 2005 website. 

Are the certification documents submitted when the taxpayer files his/her taxes?
No. Certification documents do not need to be submitted with the tax return, but must be held in the taxpayers’ files in case of audit. 

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15.   EPACT 2005 Handy Websites  
 

State Energy Codes:
Building Codes Assistance Project
Building Energy Codes Program

To order the  ASHRAE 90.1-2001 standard:
ASHRAE
TECHSTREET

The standard must be purchased. 
Lighting is covered in section 9 (page 53). 
Controls are covered in sections 9.2.1.1 and 9.2.1.2

IRS Notice 2006-52:
IRS Notice 2006-52 (pdf)

IRS Notice 2008-40:
IRS Notice 2008-40 (pdf)

FAQs:
About the Provision

The Tax Incentives Assistance Project, Business Tex Incentives: Commercial Buildings

Commercial Lighting Tex Deduction - How does it work?

Commercial Lighting Tex Deduction - Okay, but what bout…?
Commercial Lighting Tex Deduction - How does this apply to my project?

Notice 2006-52:

IRS Guidelines, Notice 2006-52 (1st permanent rules)

Approved Software:
Qualified Software for Calculating Commercial Building Tax Deductions