The Energy Policy Act of 2005 (EPAct) allows a tax deduction up to $1.80/sqft or the total project cost whichever is less for energy efficient interior lighting, heating ventilation, air-conditioning (HVAC), and building envelope systems in existing or new construction. EPAct allows the purchaser of the equipment, landlord or tenant, to recoup some of the cost during the early years of putting them into service, rather waiting the 39.5 years before depreciation. The EPAct’s extra initiatives in implementing efficient building systems serves to reduce our dependence on foreign fuel sources and improves industry competitiveness via lowering the cost of doing business.
- What is EPAct?
- House bill 1331-6 is a wide-reaching bill that primarily promotes energy efficiency in commercial and industrial facilities. To qualify for the deduction, building owners must take specific steps to document the process.
- What qualifies a corporation for a tax deduction under this new law?
- There are three main areas to which House Bill 1331-6 can be applied to qualify for a tax deduction; these are lighting, heating and ventilation, and building envelope improvements. A project that improves or replaces existing interior lighting or HVAC systems, and reduces energy use by 50% (as compared to an ASHRAE 90.1 base design building), may qualify after meeting certain criteria in the house bill. Tax deductions are also possible for building envelope improvements, such as additional wall and roof insulation, skylights for natural lighting, high efficiency windows, and reduced infiltration.
- What types of buildings qualify?
- Any commercial buildings or portions of buildings, including: manufacturing, warehouses, offices, retail, hotels, parking garages, banks, schools, apartment buildings taller than three stories, courthouses, town halls, and libraries. Churches and similar buildings do not qualify. Energy-efficient commercial building equipment is defined as property that is:
- Installed on or in any building located in the United States that is within the scope of ASHRAE/IESNA Standard 90.1 (2001);
- 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.
- 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, 2017.
- What steps must be taken from an engineering perspective to certify and claim such a tax deduction?
- We recommend that a building owner hire a professional consulting engineer before expenditure of funding to review the overall project and develop the following:
- Determination of whether the project meets the benchmark energy savings detailed in House Bill 1331-6. The structure must be compared to an ASHRAE 90.1 base design building using a modeling program authorized by the Department of Energy.
- A “Certificate of Compliance”, supplied by the Federal Government, properly completed and signed by the professional engineer.
- A letter detailing the scope of the project with attachments that support the expenditure and project cost. The process of qualifying a particular project is an engineering function that is based on the owner’s building specifications as compared to the type of system suggested and an ASHRAE 90.1 base design building.
- Why should a consulting engineering firm be involved in this process?
- This is a technical process that requires a technical approach. The development of a computerized modeling program and the actual certification must be done by a professional entity to quantify the expected savings in an objective manner. Additionally, the Engineer brings to the project an impartial view of what options are available to the client for improving his building operating costs. It would be a missed opportunity for a company to expend the funds to upgrade their equipment or systems, and then find the savings doesn’t meet their expectations, or to find out a significant deduction was not obtained due to lack of knowledge about the EPAct 2005 program, or due to improper documentation of the project.The building owner initiates the process of obtaining his tax deductions by using the services of a professional familiar with his building plan, the sophisticated techniques of building computer simulation, and procedures necessary for quantifying and documenting the tax benefits provided by EPAct 2005. The findings, which include the Consultant’s Letter of Project Overview, the Certificate of Compliance, and savings documentation, are then communicated to the other member of his team: the building owner’s accounting firm. He then uses this information to process the tax deduction as part of his preparation of the owner’s annual tax documents.
EPAct and Taxes
- What are the limits on this tax deduction?
- The deduction, allowed in the year the project is finished, is limited to $1.80 per square foot for interior lighting, HVAC, and building envelope improvement or the total project cost, whichever is less. The project must qualify in the areas detailed in the House Bill. The deduction is limited to $0.60 per square foot for interior lighting and HVAC or building envelope improvements. Deductions for renewable energy sources may be available.
- What part of my project cost can be written off?
- Any cost related to the project, including labor, may be written off.
- Does the whole building have to be deducted, or are partial deductions allowed?
- A partial deduction is allowed if the whole building does not meet the 50% energy savings requirement. Any system certified by a professional to have met the requirement may be deducted. In this case, however, the maximum benefit is $0.60 per square foot.
- After deductions, how is the rest of the property value handled?
- The basis of the property is reduced by the deducted amount. The remaining value is depreciated as normal.
- Why upgrade my lighting system?
- First, lights are easily upgraded and the equipment is readily available. Second, the energy savings are well known and high return. The energy reduction target for lighting is 40-50 percent of the minimum ASHRAE requirement, depending on building type. Partial deductions of $0.30 per square foot are allowed if the target deduction is not reached. Other requirements for interim lighting may apply.
- What types of lighting systems are eligible?
- To be considered for the deduction, the lighting must meet ASHRAE’s “permanently installed” requirements. ASHRAE 90.1-2001 defines this as “equipment that is fixed in place and is not portable or movable”. Lighting technology types are not specified in Bill 1331-6.
- Is bi-level switching required?
- It is included so that the lighting-only interim provision would result in an overall energy reduction. Typically, bi-level switching can reduce power input by 10-15% annually. It also reduces load on the HVAC for many building types.
- Should the maximum wattage of a fixture be used in calculations?
- The wattage used in calculations depends on the type of lighting technology. Lighting manufacturers and designers will be able to assist you in determining wattage best suited for your needs.
- Do new or retrofits to existing heating, ventilation, and air-conditioning (HVAC) systems qualify for an EPACT tax deduction?
- Yes, if the proposed HVAC system reduces overall energy cost by 16-2/3% compared to the same building with a HVAC system compliant with the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE) 90.1 (2001).
Building Envelope Information
- Do new or retrofits to existing building envelope systems such as windows, doors, roof and/or wall insulation qualify for an EPACT tax deduction?
- Yes, if the proposed building envelope system reduces overall energy cost by 16-2/3% compared to the same building with a building envelope system compliant with the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE) 90.1 (2001).
- Are recycling costs deductible?
- Are exit signs eligible?
- No, they are not allowed in the lighting power allowance under ASHRAE 90.1-2001.
- Are screw-in compact fluorescent lamps an accepted alternative to incandescents?
- No, the ASHRAE 90.1-2001 lighting power calculations are for maximum labeled wattage of incandescent lamps. Screw-in CFLs cannot be used to reduce wattage for purposes of the deduction.
Please click here for DAE’s EPAct Brochure.