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Compiled by FacilitiesNet Staff
Tax incentives available under EPAct 2005 — officially the Energy Policy Act of 2005 — are a proven way to reduce the cost of energy efficiency improvements for a building.
EPAct 2005 provides an immediate tax deduction of up to $1.80 per square foot for building investments that achieve specified energy cost reductions beyond ASHRAE 90.1-2001 building energy code standards. A one-time $1.80 per square foot deduction is the maximum tax deduction, but deductions of up to 60 cents per square foot are also available for three types of building systems: lighting, including lighting controls, HVAC, and the building envelope, which includes roof, walls, windows, doors and floor/foundation.
To obtain a tax deduction of 30 cents per square foot for lighting, the wattage must be reduced by 25 percent from ASHRAE 90.1-2001 levels. A maximum tax deduction of 60 cents per square foot requires a 40 percent reduction. To document the lighting electricity reduction and meet the EPAct requirements, the lighting project must have a spreadsheet to demonstrate that the project meets the EPAct watts-per-square-foot thresholds and meets seven other procedural requirements.
EPAct 2005 was set to expire before Jan. 1, 2009. But the Emergency Economic Stabilization Act of 2008 (commonly called the Rescue Package) signed by President Bush on Oct. 3 extended those deductions. The Section 179D commercial building deduction tax incentive was extended for five years, through Dec. 31, 2013.
Under the extension, buildings will continue to be eligible for tax deductions of 60 cents per square foot each for lighting, HVAC and the building envelope for energy reductions as compared to a building that meets ASHRAE 90.1 2001.
Over the past three years, most tax deductions under EPAct have been for lighting. As the lighting industry rolls out highly energy efficient but more expensive LED (light emitting diode) lighting, the five-year extension is very timely.
The extension also gives facility managers more time to take advantage of eased requirements for energy-efficient building envelope measures. Previously, the law required building envelope energy-efficiency measures to achieve a 16.7 percent reduction compared to ASHRAE 2001, the same as for lighting and HVAC, to qualify for an EPAct tax deduction.
An Internal Revenue Service Notice created an alternative way of dividing energy reductions among the three building elements. The IRS now permits building envelope measures to qualify if energy costs are reduced by 10 percent compared to ASHRAE 90.1 2001. In that case, HVAC and lighting measures must reduce energy costs by 20 percent to qualify for deductions. The old regime, with 16.7 percent reductions across the board, also remains an option.
While most EPAct deductions to date have been for lighting, there has been an increase in projects that are obtaining multiple deductions based on computer simulation modeling. More projects are being modeled because of the growth in LEED projects where modeling is mandatory and because the purchase price of computer simulation energy modeling software licenses is rapidly declining.
How EPAct Works in LEED and Government Projects