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FREQUENTLY ASKED QUESTIONS
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General Information
Is this tax deduction for new construction or
renovations or both?
Both.
What is the effective date for taking advantage of this tax
deduction?
The provision is effective for property placed in service after
December 31, 2005, and prior to January 1, 2008.
[NOTE: The EPAct 2005 tax deductions have been extended to
December 31, 2008.] For tax purposes,
"placed in service" generally means the time at which the property
is ready for its intended use.
What types of buildings will qualify? What types of
expenditures will qualify?
Section 1331 of H.R. 6 provides that energy-efficient commercial
building property is defined as property that is:
- Installed on or in any building located in
the United States that is within the scope of Standard
90.1-2001, Energy Standard for Buildings Except Low-Rise
Residential Buildings, of the American Society of Heating,
Refrigerating, and Air Conditioning Engineers and the
Illuminating Engineering Society of North America;
- Installed as part of (i) the interior
lighting systems, (ii) the heating, cooling, ventilation, and
hot water systems, or (iii) the building envelope; and
- Certified as being installed as part of a
plan designed to reduce the total annual energy and power costs
of interior lighting systems, heating, cooling, ventilation, and
hot water systems of the building by 50 percent or more when
compared to a reference building, which meets the minimum
requirements of Standard 90.1-2001 (as in effect on April 2,
2003).
If a building were designed to a
newer building standard, wouldn’t it already satisfy the conditions
for the tax deduction?
Not likely. Although lighting power densities in, for example,
ASHRAE 90.1-2004 are almost low enough to satisfy the interim
lighting LPDs, the lighting controls requirements of the interim
lighting provision go beyond those of 90.1-2004. During the
development of the legislation care was taken to insure that “free
riders” would be minimal.
Can portions of buildings be retrofitted and still qualify for a
deduction; for example; the common area versus tenant spaces; or a
portion of the common area?
Portions can be retrofitted and the associated square footage areas
considered.
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Assignment of
Deduction to the Designer
Do public buildings qualify for this tax deduction?
For energy-efficient commercial building property expenditures
made by a public entity, such as public schools, the secretary of
the treasury shall promulgate regulations that allow the deduction
to be allocated to the person primarily responsible for designing
the property in lieu of the public entity.
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Calculation Issues
May labor costs be included in the calculation of tax
deductions?
At this time it appears that labor costs that are capitalized (as
is the case generally with new construction) can be included while
those that are expensed (as is the case in general with renovations)
may not. We are waiting for additional clarity from DOE/IRS on this
topic.
What is the tax deduction amount?
The deduction is equal to energy-efficient commercial building
property expenditures made by the taxpayer, subject to a cap. The
deduction is limited to an amount equal to $1.80 per square foot of
the property for which such expenditures are made. The deduction is
allowed in the year in which the property is placed in service. For
tax purposes, "placed in service" generally means the time at which
the property is ready for its intended use.
After the deduction is taken how is the remaining asset value
handled?
As stated in the provision, the basis of the property is reduced by
the deduction amount and the remaining asset value is depreciated
over its tax life for the class of property.
The math involved in calculating the tax deduction may result
in a value between $0.30 and $0.60 that is a fraction with multiple
decimal places, such as $0.4287/sq.ft. Will there be a regulation
regarding rounding, or will the exact numbers be applied (e.g.,
$0.4287 x 1000 sq.ft. is $428.70, while $0.43 x 1000 sq.ft. is
$430.00)?
There probably will be no mention of rounding in the regulations.
Is it the case that per ASHRAE/IES 90.1 the maximum possible
wattage for the fixture will be applied?
The luminaire wattage to be used in the power calculation depends on
the type of lighting technology (see ASHRAE 90.1-2001 Section
9.2.5). Please consult lighting designers and manufacturers as to
what wattage would be appropriate for "lamp/auxiliary" combinations.
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Compliance Requirements
Are there certification requirements and if so, what are they?
Certain certification requirements must be met in order to qualify
for the deduction. The secretary of treasury, in consultation with
the secretary of energy, will promulgate regulations that describe
methods of calculating and verifying energy and power costs, using
qualified computer software based on the provisions of the 2005
California Nonresidential Alternative Calculation Method Approval
Manual or, in the case of residential property, the 2005 California
Residential Alternative Calculation Method Approval Manual. These
regulations are currently being drafted by DOE in consultation with
Treasury Department officials in advance of the implementation date
of January 1, 2006.
Will there be inspections of buildings to determine
compliance? Who will do them?
The secretary of the treasury shall prescribe procedures for the
inspection and testing for compliance of buildings that are
comparable to the requirements in the Mortgage Industry National
Accreditation Procedures for Home Energy Rating Systems. Individuals
qualified to determine compliance shall only be those recognized by
one or more organizations certified by the secretary of the treasury
for such purposes. These compliance inspection requirements are
currently under development.
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Lighting Specific Questions
Are partial deductions allowed for building subsystems instead
of a whole building deduction?
In the case of a building that does not meet the whole building
requirement of a 50 percent energy savings, a partial deduction is
allowed with respect to each separate building system that comprises
energy-efficient property and which is certified by a qualified
professional as meeting or exceeding the applicable system savings
targets established by the secretary of the treasury.
The applicable system savings targets to be established by the
secretary are those that would result in a total annual energy
savings of 50 percent for the whole building, if each of the
separate systems met the system target; note that the maximum
allowable deduction is $0.60 per square foot. The separate building
systems are the:
- Interior lighting system;
- Heating, cooling, ventilation, and hot water systems; and
- Building envelope.
What are the interim rules for lighting projects?
Building owners are encouraged under the law to focus first on
lighting systems for two reasons: first, their ease and availability
of upgrading, and second, the known achievements in energy
efficiency that will be gained. In the case of a lighting system
(including the retrofit of an existing system), until such time as
the secretary of the treasury issues final regulations, the system
energy savings target for the lighting system is deemed to be met by
a reduction in lighting power density of 40 percent (50 percent in
the case of a warehouse) of the minimum requirements in Table
9.3.1.1 or Table 9.3.1.2 of ASHRAE/IESNA Standard 90.1-2001 (as in
effect on April 2, 2003). Note that in the case of other building
systems (i.e., HVAC systems and the building envelope), partial
deductions are generally not allowed until the secretary establishes
system targets for such systems.
In the case of a lighting system that reduces lighting power density
by 25 percent, a partial deduction of $0.30 per square foot is
allowed. A pro-rated partial deduction is allowed in the case of a
lighting system that reduces lighting power density between 25 and
40 percent. Certain lighting level and lighting control requirements
must also be met in order to qualify for the partial interim
lighting deductions.
Is bi-level switching required for the interim lighting
provision?
Yes, as stated in the legislation, bi-level switching is required
for the interim provision. It is not required, but may be used in
the whole building approach as a means to reduce energy use in the
annual cost calculation needed for compliance with the provision.
I have seen several different definitions of bi-level
switching, for example in California and New York rules. What is the
definition?
Some state regulations define bi-level switching in a particular way
for their own jurisdictions. These are specific applications of a
more general approach. Bilevel switching is defined as manual or
automatic control (or a combination thereof) that provides two
levels of lighting power in a space (not including off). A space is
defined as an area enclosed by four or more floor to ceiling walls.
Dimming or switching would satisfy this definition. Of course,
besides satisfying the tax deduction requirements, an installation
would also have to satisfy whatever the regulations are for the
jurisdiction, which may, but typically don’t, require bi-level
switching.
For the purposes of the tax deduction, what luminaire wattage
do I assume for the watts per square foot calculation?
The interpretation from ASHRAE is as follows:
"The intent of section 9.1.4 (b) in ASHRAE/IESNA 90.1-2004 is to
ensure that the calculation of wattage for lighting compliance
includes ballast and/or transformer energy for the lighting
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."
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Owner vs Tenant
What if a commercial building tenant performs a retrofit that
would meet the energy savings, would they get the deduction? Is the
deduction for privately owned buildings restricted to the owner or
can a management company or a tenant in a leased space take
advantage of the deduction? The tax deduction is to be given to the
owner of the lighting system. Do you believe this enables ESCOs, if
they own the lighting system until the end of their performance
contracts, to claim the tax deduction for themselves as the legal
owner of the lighting system? Could the building owner even do it
legally if the ESCO is the owner under the performance contract?
Unfortunately, as in many matters of tax law, the question is not
Necessarily clear. The person who gets the CBTD deduction is the
person who owns the property for tax purposes. Although in many, if
not most instances, a tenant improvement will revert to the landlord
as the end of a lease, the property is not necessarily owned by the
landlord for tax purposes. It is a question of fact and the
determination depends on the arrangements between the parties. If
the tenant pays for the investment, constructs it according to its
owns specs, and there are no concessions in the lease or from the
landlord, it is likely that the tenant will be the owner of the
improvements for tax purposes and eligible to claim the CBTD
deduction.
Fortunately, this is a question that arose under the tax law before
the enactment of the CBTD. In the case of tenant improvements, the
tenant and landlord would have to determine who is the tax owner for
purposes of claiming depreciation deductions in nay event. The CBTD
does not change that determination. The CBTD simply provides a more
beneficial deduction that that normally provided by depreciation.
The analysis is the same regarding improvements in government
buildings. If the contractor is the owner for tax purposes, it can
claim the CBTD. Whether a private person can be an owner of property
with respect to a government building under the applicable local law
is a factor that would have to be taken into account in determining
who is the owner for tax purposes.
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Product Based Questions
Are exit signs included in the program; and if so; can they be
retrofits versus new signs?
No, ASHRAE 90.1-2001 does not allow exit signs to be considered in
the lighting power allowance determinations.
Are screw in compact fluorescent lamps included; and if so; is
there any requirement for permanence?
No, screw in CFLs could not be used to reduce wattage for purposes
of the deduction. The ASHRAE 90.1-2001 lighting power calculations
require that the maximum labeled wattage of incandescent luminaire
be used.
Is there a criterion for what type of lighting systems qualify
for the partial tax deduction? For example, in a manufacturing
facility, would task lighting upgrades qualify if the LPD is reduced
by enough to obtain the deduction? Or is the deduction for ceiling
lighting system upgrades?
The legislation does not specify lighting technology for the tax
deduction. The applicability of task lighting would typically turn
on the question of whether it is "permanently installed". ASHRAE
90.1-2001 defines "permanently installed" as "equipment that is
fixed in place and is not portable or movable" . To be considered,
then, the task lighting would need to satisfy this definition.
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Questions About Space Types
Are garages eligible for the deduction?
Yes, parking garages are a space type covered by ASHRAE 90.1
Are churches eligible for the deduction?
No. Although religious buildings are in 90.1 and they don’t pay
taxes, they are not government buildings, so churches don’t qualify.
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What they have not told
us so far?
We are currently waiting for DOE and IRS regulations regarding
the following questions:
- Exactly how the assignment of the deduction to the designer
on public buildings will work.
- What the specific compliance logistics are.
- The forms that are needed.
- The exact definition of bi-level switching.
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