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Frequently Asked Questions

Is this tax deduction for new construction or renovations or both?

Both.

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.

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. For tax purposes, "placed in service" generally means the time at which the property is ready for its intended use.

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.

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.

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.

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 26 percent, a partial deduction of $0.04 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 26 and 40 percent. Certain lighting level and lighting control requirements must also be met in order to qualify for the partial interim lighting deductions.

What don't we know?

We are currently waiting for DOE and IRS regulations regarding the following questions:

  • How does the fact that warehouses have a different threshold change the calculation? If the warehouse part of a project does not meet the 50% threshold while the rest of the project would otherwise qualify, how does this affect the deduction? How does the sliding scale calculation work when there is a warehouse component?

 


These EPAct Summary Pages are meant to provide a general overview of the tax provisions of the Energy Policy Act 2005. Please contact your tax advisor to determine the specific tax treatment appropriate for your company.

 
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