The Energy Policy Act of 2005 and the Lighting Industry:
Tax deductions encourage adoption of efficient technologies while product efficacy is raised through regulation
By The Lighting Controls Association and OSRAM SYLVANIA
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On August 8, 2005, President Bush signed the Energy Policy Act of 2005 (EPAct 2005).
Estimated to cost about $14.5 billion over 10 years, EPAct 2005 is the biggest
overhaul of national energy policy since 1992. EPAct 1992 required the phased
elimination of several popular types of fluorescent and incandescent lamps, and
began the deregulation process of the $300 billion electric power industry.
EPAct 2005 is considered to be less ambitious on energys demand side than its
supply side, but does include a number of energy conservation provisions
supported by the National Electrical Manufacturers Association (NEMA), several of
which are of great interest to the lighting community.
EPAct 2005 contains a significant provision that includes a tax deduction of up
to $1.80 per square foot for building owners to encourage investment in energy
efficient building systems. This provision is anticipated to stimulate
widespread investment, and is supported by NEMA and various industry,
efficiency advocacy, and environmental organizations.
The Tax Deduction
Under current law, the cost of energy saving investments must be capitalized and depreciated over time.
The Energy Policy Act of 2005 contains a variety of tax credits and deductions for business and consumers,
says Kyle Pitsor, Vice President Government Relations for NEMA. The NEMA-backed commercial building tax deduction
is designed to encourage investment in energy-efficient commercial buildings. This provision is the first time a special
deduction is available for expenses incurred for energy-efficient commercial building property. Lighting products and systems
are ideally positioned for deployment using the deduction provision. Specifically, EPAct 2005s Energy Efficient Commercial
Buildings Deduction provides one of three possible tax deductions.
Energy-efficient commercial property:
EPAct 2005 provides a tax deduction of up to $1.80 per square foot for investment in
energy-efficient commercial building property as part of new construction or renovation
(within the scope of the ASHRAE/IES 90.1 Standard). The amount of the deduction is the
lesser of: 1) $1.80 per square foot or 2) the costs incurred or paid for the energy-efficient property.
Energy-efficient property is defined by EPAct 2005 to be commercial building property
that is certified to reduce total annual energy and power costs to at least 50% less than
a building satisfying the 90.1-2001 Standard. Qualifying systems include 1) interior lighting
systems, 2) heating, cooling, ventilation and hot water systems, and 3) building envelope.
In addition, the property must 1) be otherwise depreciable property, 2) located in the United States,
3) paid to be constructed by the taxpayer seeking the deduction.
EPAct 2005 instructs the Secretary of the Treasury, in consultation with the Secretary of Energy, to
develop an energy-savings target for each type of system covered (interior lighting, HVAC/hot water,
building envelope). Meeting any of the three targets will be another route building owners can take to
demonstrate qualification for the deduction.
If a property does not qualify for the $1.80 tax deduction, but one of the qualifying systems meets its
designated energy savings target, then the property will be eligible for a partial tax deduction. Therefore,
if a commercial building property does not meet the requirement, but the interior lighting system meets its
own energy-savings target, then a partial tax deduction may be allowed. This deduction/system is the lesser
of 1) $0.60/sq.ft. or 2) the costs incurred or paid for the energy-efficient system. Costs are defined as any
that would normally be part of the capital costs involved in implementing the energy-efficient system and may
include labor, materials and engineering design charges.
Interim rules for lighting systems:
EPAct 2005 establishes interim rules for lighting systems effective until the Secretary of the Treasury issues
the final regulations defining the energy-savings target for lighting systems. The Interim Rules for Lighting
Systems define the lighting system energy-savings target to be a lighting power density that is 25-40% lower
than the minimum requirement in Table 126.96.36.199 Building Area Method or Table 188.8.131.52 Space-by-Space Method
(not including additional interior lighting power allowances) of Standard 90.1-2001. For warehouses, the lighting
power density must be 50% lower than the minimum requirements of Standard 90.1-2001. For lighting systems in buildings
other than warehouses, the amount of the tax deduction is the lesser of 1) $0.30-$0.60/sq.ft. or 2) the costs incurred
or paid for the energy efficient lighting systems. For reductions in lighting power density between 25% and 40% the
table on page 10 indicates the amount of the maximum eligible deduction. Lighting power density reductions of less than
25% are ineligible for any tax deduction.
Suppose the redesign of an interior lighting system in an office building
achieves a lighting power density that is 38% lower than the minimum requirements of Standard 90.1-2001. The maximum possible
tax deduction is: $0.56/sq.ft. (not to exceed the cost of the redesign).
Besides demonstrating a reduction in lighting power density than Standard
90.1-2001, all controls provisions in the Standard must be met. Bi-level switching, automatic light shut-off (>5000 sq.ft) and
tandem ballast wiring must be installed for most buildings, and the application must meet the minimum requirements for calculated
light levels as set forth in the 9th Edition of the IESNA Lighting Handbook.
How to claim credit:
The Treasury Secretary will be implementing rules that lay out the certification program based on qualified software programs. A number
of such programs are in use today. The tax deduction is allowable in the year in which the energy-efficient property is placed in service.
The Treasury Department will be issuing appropriate modifications to its forms to implement the provision. Lighting and building management
professionals are encouraged to seek the consultation of tax experts.
Who can claim the deduction:
The tax deduction for private buildings goes to the owner or the person or entity that paid to have the building
constructed or renovated. In the case of Public Property; Subtitle C, Section 1331, Subsection 17D, Part 4 of the
Act states: ALLOCATION OF DEDUCTION FOR PUBLIC PROPERTY. In the case of energy efficient commercial building
property installed on or in property owned by a Federal, State, or local government or a political subdivision
thereof, the Secretary shall promulgate a regulation to allow the allocation of the deduction to the person primarily
responsible for designing the property in lieu of the owner of such property. Such person shall be treated as the taxpayer
for purposes of this section. Such persons or firms seeking this deduction are encouraged to consult a tax expert.
Window of opportunity:
EPAct 2005s Energy Efficient Commercial Buildings Deduction applies with respect to property placed in service between
January 1, 2006 and December 31, 2007, inclusive. Congress may extend the window by an act of legislation, which NEMA is
planning to advocate by demonstrating the success of the deduction in stimulating energy savings in cooperation with its
members and others.
NEMA estimates that the energy capacity savings for lighting alone is about 312MW of electricity for the two-year provision,
which will result in a reduction of about 10 million metric tons of carbon emissions. NEMA further estimates that the provision
will generate about $500 million in additional sales of lighting systems and products alone. The provision offers opportunities
to design, install, service and maintain energy efficient lighting, HVAC and building envelope systems, says Pitsor. In addition,
the building owner may be able to take credit in complying with the provision using daylighting, improved fan efficiency, multiple- or
variable-speed compressors, on-site generators, and wiring with lower energy losses, to name a few technologies. There are market opportunities
along the entire value chain.