Energy-Efficient Commercial Building Property Tax Deduction
Summary of Provision in the Energy Tax Titles
A provision in the recent energy tax titles would provide a deduction equal to the qualified
portion of energy-efficient commercial building property expenditures made by the taxpayer
concerning lighting, HVAC and building envelope systems in commercial buildings. This provision
has widespread industry and environmental community support and is designed to encourage broad
energy cost savings investment. Under present law, the cost of energy-savings devices placed in
service with respect to a commercial building must be capitalized and depreciated over time.
How Would The Provision Operate?
Energy-efficient commercial building property expenditures are amounts paid or incurred for
energy-efficient commercial building property installed in connection with the new construction or
reconstruction of property: (1) which would otherwise be depreciable property, (2) which is located in
the United States, and (3) the construction or erection of which is completed by the taxpayer. The
deduction is allowed for energy-efficient commercial building property placed in service pursuant to
new construction, as well as with respect to renovations and additions of qualified buildings
previously placed in service. The deduction is limited to the lesser of (1) the amounts paid or incurred
for energy-efficient commercial building property or (2) $2.25 a square foot.
Energy-efficient commercial building property means any property that is certified to reduce
total annual energy and power costs by an amount that is at least 50 percent greater than the most
stringent standards applicable to a qualified building in the following categories: (1) lighting systems;
(2) heating, cooling, ventilation, and hot water supply systems; or (3) the building envelope.
The legislation provides for the pass-through of the benefit in the case of publicly owned
buildings. The provision is effective for taxable years beginning after date of enactment; property
plans must be certified before January 1, 2008 and construction completed before January 1, 2010.
Detailed rules for system compliance would be developed quickly pursuant to regulations
promulgated by the Treasury in consultation with the Department of Energy. However, in order to
make this tax incentive available as soon as possible, special interim rules are provided for lighting
systems. Under these interim rules, lighting system-specific targets are provided to qualify the
taxpayer for a limited deduction. Lighting systems meeting certain prescriptive requirements can
qualify for a deduction equal to between 37.5 cents and 75 cents per square foot.
Commercial buildings consume some twenty-five percent of the nation’s electricity. The
Commercial Building Tax Deduction is designed to have the greatest “bang-for-the buck” to save
energy and encourage energy efficiency in U.S. commercial building stock. The provision is
supported by industry and environmental groups, supports “best practices,” and is fiscally responsible.
A more detailed description of this provision is available by contacting NEMA Government Relations
on (703) 841-3245.
Analysis of the Rules Applicable to Lighting Systems in the
Energy Efficient Commercial Building Provision
Over the last three years, the tax titles to the energy bills in the House and Senate contained a
provision designed to encourage investment in energy efficient commercial buildings. These
provisions generally allow a $2.25 per square foot deduction for energy saving devices installed in
commercial buildings that achieve a 50 percent or greater energy savings relative to the requirements
of ASHRAE Standard 90.1-2001
The energy efficient commercial building provision supported by the National Electrical
Manufacturers Association (NEMA) and environmental groups would also provide a partial deduction
for lighting retrofits that meet certain specifications. In order to qualify for this limited deduction
(between $.375 and .75 per square foot), the lighting system must meet the following minimum
1. It must provide a reduction in lighting power density between 25 and 40 percent relative to
the minimum requirements in table 126.96.36.199 or 188.8.131.52 (not including additional interior
lighting power allowances) of ASHRAE Standard 90.1-2001;
2. It must fully comply with the mandatory and prescriptive requirements of Standard 90.1-2001
for controls and circuiting and provide for bilevel switching in all occupancies (except hotel
and motel guest rooms, store rooms, restrooms, and public lobbies); and
3. It must meet the minimum requirements for calculated lighting levels as set forth in the
Illuminating Engineering Society of North America Lighting Handbook, Performance and
Application, Ninth Edition, 2000.
More restrictive requirements apply to warehouses. In addition, the Treasury Department has
the authority to modify these requirements for lighting systems to qualify for the tax incentive. The
provision sunsets after a specified period.
Rationale for Inclusion of the Rules Applicable to Lighting Systems:
The energy efficient commercial building provisions in the Senate and House bills generally
impose energy saving requirements with respect to whole buildings. Such savings are practically
achievable only to the extent significant investment is made in energy saving designs and devices in
the lighting systems; heating, ventilation and air conditioning (HVAC) systems; and building
envelope. Thus, meeting the “whole building” requirement is feasible only with respect to new
construction because it is not possible to retrofit the HVAC systems and envelopes of existing
However, it is economically feasible to retrofit the lighting system of a current building in
order to achieve energy efficiency. Thus, the provision allows limited deduction (between $.375 and
.75 per square foot) for achieving specified energy savings with respect to the lighting systems of a
commercial building. Providing the limited deduction for lighting systems will provide immediate
energy savings as commercial building owners retrofit existing buildings to meet the applicable
standards. In addition, such retrofit activity will form a foundation for meeting the “whole building”
requirement with respect to new construction by helping building design architects and engineers and
commercial building owners overcome the “learning curve” with respect to the provision.
The rules applicable to lighting systems were carefully crafted to achieve the “biggest bang
for the buck” with respect to energy savings relative to the cost to the Treasury. The agreed-upon
standards correspond to the 50-percent “whole building” requirement. The standards are achievable
with recently commercialized technologies. However, these technologies currently are not being
utilized in construction and retrofit designs for a variety of reasons, including cost concerns and a lack
of market awareness.
NEMA estimates that the retrofit lighting provision alone would save about 312 MW of
electricity at the point of use over four years. This is equivalent to the output of a new power plant, as
well as providing a reduction in the stress in the electric transmission grid by the same amount.
NEMA estimates the cost to the Treasury for the retrofit provision would be about $60 million,
compared to the cost of an equivalent power plant of $203 million (not including saved fuel and
operating costs). The reduction in power plant carbon emissions would be about 10 million metric
tons over the four-year life of the tax provision, with continued air quality benefits after the tax
The lighting provision is designed to preclude any “free ridership,” i.e., taxpayers who would
make these investments even without the tax incentive. Providing a partial tax deduction for lighting
systems will allow building owners to recover only a portion of the cost of investment in energy
savings devices. In general, in order to qualify for the $.375 a square foot deduction (worth less than
$.125 a square foot on an after-tax basis), a taxpayer would be required to invest $.90 a square foot.
The tax benefit thus covers a portion of the taxpayer’s incremental investment. However, NEMA
believes that such tax savings, combined with the energy savings, will provide the necessary incentive
to building owners to begin investing in energy saving retrofit designs.
The lighting provision is unique in that it represents a meeting of the minds between industry
and environmental groups on the best way to achieve energy savings. The provision is supported by a
variety of industry and environmental groups, supports “best practices,” and is fiscally responsible.