FAQs on Interim Lighting Guidelines

This page provides general information about the Energy Policy Act of 2005 and is not intended to provide legal or tax advice. The information is believed to be accurate, but GE makes no warranty or guarantee, express or implied, regarding the accuracy of this concise summary and explanation. Consult an attorney or tax professional regarding your specific situation.
 

It is an accelerated tax deduction for capital improvements to new or existing buildings. More specifically, this provision allows a company to write off a significant portion (up to 60 cents per square foot) of a capital investment in an energy efficient lighting system in the year it was installed (if placed in service in 2006 through 2016).

IRS rules for writing off investments in long term capital assets varies, but can be as long as 39 years for capital improvements to building structures. The ability to immediately deduct almost the full cost an capital investment in a lighting system provides a significant financial incentive to a for-profit company.

 

The interim lighting rule deduction is calculated based on watts-per-square-foot (lighting power density) of the new lighting system. It is not based on the actual hours of energy use. In most common situations, if the watts-per-square-foot of the new lighting system is at least 25% below the lighting power density specified in 2001 ASHRAE/IESNA 90.1 standard for projects completed in 2006 through 2015, or the 2007 ASHRAE/IES 90.1 standard for projects completed in 2016, you may be eligible for an accelerated tax deduction.

 

As a standard, ASHRAE/IESNA 90.1 is voluntary and applicable to new construction, additions, or major renovations. However, the federal government required states to adopt a mandatory building energy code by 2004.

Most states have adopted 90.1 as their mandatory building energy code. Some States, like CA (Title 24) have developed their own building code. The International Codes Council (ICC) has also adopted the 90.1 code as the basis of their International Energy Conservation Code (IECC.) Some states adopt all of the ICC building codes, including the IECC code.

 

The Energy Policy Act refers to numbers in the 2001 version of the ASHRAE/IESNA 90.1 document. The current version is a later version, released in 2004, but the Energy Policy Act refers to the tables in the 2001 version.

 

If a space has multiple lighting systems, the watts-per-square-foot (lighting power density) is calculated as the total of all the lighting systems present in that space.

Exception: If using the additional lighting power allowed in the 90.1 standard for accent lighting, this additional lighting power is not included in the tax incentive calculation. Also, if two separate lighting systems in the same space (such as a hotel multi-purpose room) are controlled so that they cannot be operated simultaneously, only the lighting system with the highest wattage is included.

 

Yes, as long as it is completed from 2006 through 2008.

 

Per the ASHRAE/IESNA 90.1 standard, new buildings greater than 5000 sq. ft. must include automatic lighting shut-off. The 90.1 standard does not require lighting retrofits to include automatic shut-off lighting controls. However, the Energy Policy Act introduces a new requirement of bi-level switching in order to qualify for the tax incentive for both new construction and existing building retrofits.

 

Yes. While this is a very unlikely situation, it is theoretically possible. The deduction depends on watts-per-square-foot (lighting power density) of the final system, regardless of the original watts-per-square-foot calculation. For example, it may be possible to replace the lighting in a poorly lighted space with new energy efficient fixtures providing a much higher light level and still qualify for a tax deduction, even though the old inefficient system and the new efficient system use the same amount of power. In this rare case, both the old and new systems would be designed at least 25% below the appropriate energy code standards.

 

Yes. The tax deduction is essentially an accelerated depreciation of a capital asset investment. The asset must be shown on the books for the increased depreciation to be taken in the first year. An ordinary expense shows up in the books as expense in the same year in which it was incurred. Expenses reduce the income reported in the year they occur. A capital investment adds to the net value of the assets shown on the company books but only the amount depreciated that year reduces taxable income. For example, if you buy production equipment for $28,000 and depreciate it (straight line) for 7 years, it shows up as a deduction of $4000 each year for seven years.

 

No. The simple reason is that lamp replacements are generally accounted for as maintenance expense and not as investment. However, because they are accounted for as expense, they reduce taxable income that year. In effect, the customer is getting a 100% tax deduction on the money spent on replacement lamps, even without the EPAct deduction.

 

No. The tax deduction is only for the interior of buildings, not for outdoor lighting. An indoor parking garage would qualify.

 

For a warehouse to qualify, it has to be at or below 50% of the watts per square foot specified in the ASHRAE/IESNA 90.1 document, and then it qualifies for a $0.60 per square foot deduction.

 

Warehouse operations vary greatly. The 90.1 code allows enough power for very active warehouses, with very high ceilings, lit to high light levels. However, many existing warehouses operate at low lighting levels with low power densities that are already at a level 25% below the 90.1 standard. Therefore, the incentive is more stringent in this application.

 

Yes, using the Space-by-Space method from ASHRAE/IESNA 90.1 and the interim lighting rule. For example, if a certain portion of the building is remodeled, you can calculate the code-allowed wattage for each space and add all spaces together. The new lighting system must operate at least 25% below this space-by-space calculated level for the areas retrofitted.

 

No. You can only take the permitted tax deduction up to the value of the asset. This is typically the lighting equipment and associated installation labor. You cannot take a deduction for more than you have spent.

 

The benefit of EPAct is that it allows a larger portion of the capital investment to be deducted in the first year. Generally, lighting retrofit investments are amortized over the life of the system. The Energy Policy Act allows a larger portion to be amortized or depreciated in the first year. IRS rules for writing off investments in long term capital assets varies, but can be as long as 39 years for capital improvements to building structures. The ability to immediately deduct almost the full cost a capital investment in a lighting system provides a significant financial incentive to a for-profit company.

 

Not necessarily. The tax deduction is available to the entity that is carrying the fixtures as an asset on their books. This may not be the entity that is paying the electric bill.

 

If using the interim lighting rule, bi-level switching is required for all spaces except: lobbies, motel/hotel guest rooms, rest rooms and store rooms.

 

Bi-level switching is defined as manual or automatic control (or a combination thereof) that provides two levels of lighting power in a space (not including off). A space is defined as an area enclosed by four (or more) floor-to-ceiling walls. Dimming or switching would satisfy this definition. As an example, a separately controlled task/ambient lighting system in an office would satisfy this definition. It is clear that one switch controlling all of the lights in a single space would not qualify.

 

Not if the occupancy sensor turns off all the lights in the room. But if the occupancy sensor only controls some of the lighting fixtures or some of the lamps within fixture so that some level of lighting is retained even when an occupancy sensor turns off the lights, then it would qualify.

Dimming qualifies as bi-level switching.

 

Not directly. In the case of a nonprofit facility owned by a federal, state or local government, the allocation of the deduction can go to the person primarily responsible for designing the property in lieu of the owner of such property. In March 2008, the IRS issued guidance specifying that a government facility can allocate this deduction in writing to the architect, engineer, contractor, energy consultant or ESCO involved with project, or can split the deduction among two or more of these entities.

 

Labor to install the new fixtures is considered part of the asset value. The labor to remove the old fixture is considered a simple expense and is not capitalized.

 

A qualified individual is:

  • not related (does not have an employer/employee relationship) to the taxpayer claiming the deduction;
  • is an engineer or contractor that is properly licensed as a professional engineer or contractor in the jurisdiction in which the building is located; and
  • has represented in writing to the taxpayer that he or she has the requisite qualifications to provide the certification required or/and to perform the inspection required.

 

No. The interim lighting rules will still be applicable through the end of 2008. The IRS guidance document gives taxpayers the option to use the whole building rules in the guidance document or the interim lighting rules. Essentially two permanent rules are in effect.

 

No. The performance method requires energy and power costs to be calculated by approved software, which is not applicable to the interim lighting rules. Energy and power costs are only applicable when using the whole building method.

 

The Department of Energy maintains a public list of software that may be used for the performance method at: www1.eere.energy.gov/buildings/commercial/qualified_software.html

 

No. Use the industry definition of bi-level switching unless a state, like CA, has a more stringent interpretation for new construction. Industry defines bi-level switching as manual or automatic control (or a combination thereof) that provides two levels of lighting power in a space (not including off). A space is defined as an area enclosed by four (or more) floor-to-ceiling walls. Dimming or switching would satisfy this definition. It is clear that one switch controlling all of the lights in a single space would not qualify.

 

Yes. In March of 2008, the IRS issued a guidance document providing details on how the designer of a lighting system for a non-profit government building can take a tax deduction.