The Internal Revenue Service (IRS) has announced certification requirements an owner must satisfy to take advantage of “energy-efficient commercial building property” tax incentives. The requirements are included in IRS Notice 2006-52, an “interim guidance” document available from the Web site of the National Lighting Bureau.
According to National Lighting Bureau Communications Director John P. Bachner, “The new IRS guidance requires a qualified individual to attest to a given system’s energy efficiency. Qualified individuals are licensed engineers and contractors who believe they have the necessary competence to make the evaluations involved. We suspect that additional guidance will be forthcoming to clarify some of the questions that Notice 2006-52 has raised. In the meantime, the Bureau is launching a nationwide effort to identify qualified individuals, so we can list them on our Web site.”
Congress created the tax incentives – Section 1331 of the Energy Policy Act of 2005 – to encourage building owners to invest in energy efficient commercial building property that is:
1. 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 (ASHRAE) and the Illuminating Engineering Society of North America (IESNA);
2. Installed as part of (i) the interior lighting systems, (ii) the heating, ventilation, air-conditioning (HVAC) and hot water (HW) systems, or (iii) the building envelope; and
3. Certified as being installed as part of a plan designed to reduce the total annual energy and power costs of the building’s interior lighting, HVAC, and hot water systems by 50% or more when compared to a reference building that meets the minimum requirements of Standard 90.1-2001.
The incentives take the form of an accelerated depreciation deduction for (typically) a portion of a system’s cost. Owners that achieve the 50% target for the interior lighting system, HVAC/HW system, and the building envelope would be eligible for a benefit equal to the actual cost of the improvements or $1.80 per square foot of the property for which the expenditures were made, whichever is less. Owners would have to demonstrate compliance using an approved computer program.
Owners do not have to upgrade all three systems to enjoy tax benefits. They can opt to improve the interior lighting, or the HVAC and hot water systems, or the building envelope. “Lighting is the easiest to improve,” Bachner said, “because of the wide array of equipment and design techniques available. It can also be relatively easy to calculate the energy savings to be achieved by any given interior lighting upgrade.” According to Bachner, the tax incentives apply to most interior lighting systems whose power density is at least 25% less than minimum requirements set forth in Standard 90.1-2001. Owners can deduct as much as $0.60 per square foot or the actual cost of the upgrade, whichever is less, when the system’s lighting power density is 40% less than Standard 90.1-2001’s minimum requirements.
For the deduction to be legitimate, the lighting system must be certified by “a qualified individual,” someone whom the IRS defines as a licensed engineer or contractor who “has represented to the taxpayer that he or she has the requisite qualifications to provide the certification required” and/or to perform the inspection and testing that is also mandated.
The “qualified individual” can assess compliance either by using computer software or – as will more likely be the case – by relying on the prescriptive method included in Section 2.03(1)(b) of Notice 2006-52. Using the latter approach, a “qualified individual” would certify that the new lighting:
• achieves a lighting power density reduction of at least 25% (50% for warehouses) of the minimum requirements in Table 18.104.22.168 or Table 22.214.171.124 (not including additional interior lighting power allowances) of Standard 90.1-2001;
• has controls and circuiting that comply with the mandatory and prescriptive requirements of Standard 90.1-2001;
• includes a provision for bi-level switching in all occupancies except hotel and motel guest rooms, store rooms, restrooms, and public lobbies; and
• meets minimum requirements for calculated lighting levels set for in the IESNA Lighting Handbook, Performance and Application, Ninth Edition, 2000.
IRS Notice 2006-52 contains more information about interior lighting and other systems eligible for tax incentives. The National Lighting Bureau has also prepared a brochure providing additional information about the Energy Policy Act of 2005. The brochure, as well as the IRS notice, is available for free download at www.nlb.org or by contacting the National Lighting Bureau by telephone (301/587-9572) or e-mail ([email protected]).