(Issue: April 2020)

Commercial Buildings Deduction Is Back

By Craig DiLouie, CLCP, LC

In late December 2019, President Trump signed the Further Consolidated Appropriations Act (HR1865) into law, which extended the Energy-Efficient Commercial Buildings Tax Deduction (CBTD) retroactively to January 1, 2018 onward to December 31, 2020. This revives a financial incentive that lighting management companies can use to promote adoption of energy-efficient lighting retrofits anywhere in the United States. 

The CBTD, which was created by the Energy Policy Act of 2005, modifies Section 179D of the Federal tax code to provide an accelerated tax deduction of $0.60-$1.80/sq.ft. of installed area as an incentive to install energy-efficient interior lighting, HVAC/hot water systems, and building envelope. 

The CBTD was allowed to expire several times, only to be revived. Like a zombie, the CBTD keeps coming back in appropriations bills, usually retroactively to the beginning of the current or previous year. This latest appropriations law extends it to include the years 2018-2020. 

The CBTD is important because it allows building owners to claim a tax deduction for installed improvements in a single year instead of spread out over a period of years, as required by tax law. This is subject to a cap of $0.60/sq.ft. for installing an individual system (lighting, HVAC/hot water, building envelope) or $1.80/sq.ft. for installing all three. Whatever cost is left over is then deducted normally. If the building is publicly owned, the party or parties that created the technical specifications for the installation can claim the CBTD. Religious buildings do not qualify because religious organizations are exempt from taxation. 

Now let’s get into lighting. There are two ways to get the deduction, the “normal” CBTD and the Interim Lighting Rule, which despite its misleading name has endured as a CBTD option since the beginning. To get the CBTD, interior lighting must be installed that gains sufficient energy reductions compared to a baseline, which is the ASHRAE/IES 90.1 energy standard. The CBTD was once based on the 2001 version but is now based on the 2007 version, making it more difficult to achieve. These reductions must be demonstrated using energy modeling and qualified software. Because of these requirements, the CBTD may be better suited to new construction and renovation rather than existing building upgrades. 

For the latter market, the Interim Lighting Rule may be more suitable. Owners install energy-efficient interior lighting that reduces lighting power density by 25-40 percent compared to ASHRAE/IES 90.1-2007, and is rewarded with an accelerated tax deduction of up to $0.30-$0.60/sq.ft. to cover its cost. An exception is warehouses, where the new lighting must achieve a 50 percent lower LPD to gain a deduction up to $0.60/sq.ft. 

Besides reducing lighting power density, the owner must also install bilevel switching controls in a majority of occupancies, which may be dimmable LED lighting. The project must achieve minimum light levels prescribed in the Ninth Edition of the IES Lighting Handbook. 

After installation, per IRS Notice 2008-40, the project must be certified by a contractor or engineer properly licensed in the jurisdiction in which the building is located, and who is not in the owner’s direct employ. This party certifies the project in writing, stating it achieves the necessary energy savings, features bilevel switching, and realizes appropriate light levels. Any software can be used to calculate the energy 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 projected lighting power density. 

While the CBTD has ridden a rocky road, it has endured to offer commercial building owners across the United States a strong incentive to upgrade their interior lighting systems. With today’s LED technology and dimmable drivers, lighting management companies can derive the necessary savings. 

Learn more here. 

Craig DiLouie, CLCP, LC, principal of ZING Communications, Inc., is a consultant, analyst and reporter specializing in the lighting and electrical industries, and a regular contributor to LM&M. You may contact Craig at cdilouie@zinginc.com.