Originally published in the January issue of tED Magazine, the official publication of the NAED. Reprinted with permission.

Among its many provisions, the Inflation Reduction Act of 2022 revamped the venerable Commercial Buildings Tax Deduction (CBTD), which incentivizes building owners to invest in energy-efficient interior lighting, HVAC/hot water systems, and/or building envelope. Electrical distributors can benefit by refamiliarizing themselves with its requirements, educating partners and potential customers, and supporting projects with packages of the most energy-efficient products.

Affected by the Energy Policy Act of 2005, the CBTD (U.S. tax code Section 179D) created a financial incentive to invest in building energy efficiency by defraying the initial cost. The economic benefit is an accelerated tax deduction, which means the owner claims the deduction in a single year rather than over multiple years. The CBTD is expressed in dollars per square foot earned by exceeding the efficiency of a reference building.

The CBTD has had a rocky history, frequently expiring and then being reinstated (often retroactively). A 2015 tax bill then updated the reference building from one that meets the requirements of the 2001 version of the ANSI/ASHRAE/IES 90.1 energy standard to one satisfying the 2007 version, making it more difficult to earn. The Consolidated Appropriations Act of 2001 finally made the CBTD permanent while adding an inflation adjustment and authorizing the Treasury Secretary to update the reference building in the future. Then came a total revamp with the Inflation Reduction Act.

Passed in August 2022, this law made major changes. The scope of qualifying projects increased, notably to certain tax-exempt buildings such as houses of worship. The CBTD can now be claimed multiple times instead of only once. The potential value of the incentive increased, while the total energy savings goal was reduced. Unfortunately for the lighting category, the interim lighting rule, always intended to be temporary, was finally retired. A new retrofit path to the CBTD, however, appears to offer fertile ground for lighting and other building upgrades.

“While the Inflation Reduction Act removed the interim lighting rule from 179D, we can still anticipate a positive impact on demand for energy-efficient LED lighting,” said Kelly Seeger, Technical Policy Director, Signify (www.Signify.com). “Upgrading to LED lighting and controls will remain an attractive opportunity for many buildings even with the need for energy modeling, and depending on what is existing, may present significant savings. Put this together with a lower qualifying energy savings target and the expansion of the incentive to additional commercial building types such as hospitals and religious facilities, and we should continue to see lighting installations receiving incentives.”

How it works

Projects in the United States that are within the scope of 90.1 (office, warehouse, etc.) and install “energy-efficient property” (normally tax-depreciable, permanently installed interior lighting, HVAC/hot water systems, and/or building envelope) qualify for the CBTD.

For new construction, “energy-efficient” means total building annual energy and power costs are reduced by at least 25 percent compared to a reference building. This reference building is one that complies with the minimum requirements of the 2007 version of 90.1, though the Treasury Secretary has the authority to affirm a more stringent version at some point.

For retrofits in existing buildings, “energy-efficient” means total energy use intensity (measured in BTU) is decreased by at least 25 percent compared to the reference building, which in this case is the existing building itself prior to the planned upgrades. Along with other requirements, the building must have been placed in service at least five years prior to the planned upgrade to qualify, and the deduction must be taken in the year of final qualifying certification.

As for the incentive, it’s an accelerated tax deduction on a sliding scale based on extent of energy savings, with a significant bonus for projects that satisfy prevailing wage and apprenticeship requirements. The CBTD is $0.50/sq.ft. for a 25 percent reduction, increasing $0.02/sq.ft. for each 1 percent additional reduction beyond the baseline to a $1.00 maximum. If prevailing wage and apprenticeship requirements are met, the CBTD increases to $2.50/sq.ft. increasing $0.10/sq.ft. for each 1 percent additional energy reduction up to a $5.00/sq.ft. cap.

The owner claims the deduction, though in the case of tax-exempt entities, the property’s designer may claim it. Buildings can claim the deduction multiple times—every three years, four for tax-exempt entities—as long as they satisfy the requirements of 179D. The project must be certified, which involves using qualified software for modeling and other requirements.

Interior lighting and the CBTD

The old CBTD’s Interim Lighting Rule was popular for lighting upgrades but has been eliminated with the Inflation Reduction Act. Lighting’s participation in the new CBTD is now likely to be holistic—working in concert with other building upgrades—and subject to a process that involves software-based energy modeling. Compared to 90.1’s 2007 version, however, LED lighting, advanced controls, good design, and building systems integration can contribute significant energy savings.

“Control strategies spanning occupancy sensing to daylight harvesting to high-end trimming can easily help meet the qualification target for CBTD,” said Rahul Shira, Senior Product Marketing Manager, Signify. “However, technology has advanced since the 90.1-2007 benchmark. Now advanced lighting control systems are available at an attractive price point with the potential to unlock deeper energy savings. With smart sensors and wireless communication technology that can be easily integrated into LED luminaires, lighting systems can deliver up to 75 percent energy savings, lower installation costs, and better maintenance outcomes, all without compromising occupant comfort.”

Compared to older existing buildings, lighting’s role can have be even more significant, particularly when additional loads such as HVAC and plug loads are incorporated into a lighting control scheme.

“We know that existing buildings make up the lion’s share of the buildings in the U.S.,” said Seeger. “In many cases, it may not have been upgraded to LED lighting yet. LED lighting has enormous energy savings impact when it replaces fluorescent. In newer existing buildings that may already have LED lighting, additional energy savings can be garnered with time-based, occupancy, and plug load controls.”

“Keep it simple,” Shira added. “If you focus on stocking and supplying luminaire-integrated lighting control systems, you can be confident that a project will qualify for the CBTD.”

Overall, the new CBTD offers building owners a strong financial incentive that either on its own or combined with utility rebates can significantly reduce the initial cost for investing in more-energy-efficient buildings. It’s more involved than its predecessor, however, requiring resources that can deliver the required modeling and certification.

To learn more, consult the current text of 179D as published by Cornell Law School at shorturl.at/tMXY7 or knowledgeable partners or suppliers.

Find our previous articles about the Commercial Building Tax Deduction here. 

Craig DiLouie

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