IRS Guidance for Commercial Buildings Tax Deduction

On June 2nd, 2006 Internal Revenue Service of the U. S. Department of Treasury released Notice 2006-52, Deductions for Energy Efficient Commercial Buildings. This document offers interim guidance relating to the tax deduction for energy efficient commercial building upgrades under 179D of the Internal Revenue Code. Specifically, the notice sets forth a process that allows a taxpayer who owns, or is a lessee of, a commercial building and installs property as part of the commercial building's interior lighting systems, heating, cooling, ventilation, and hot water systems, or building envelope to obtain a certification that the property satisfies energy efficiency requirements.

Section 179D allows a deduction to a taxpayer for part or all of the cost of energy efficient commercial building property that the taxpayer places in service after December 31, 2005 and before January 1st, 2017 as extended by Congress.

Questions & Answers about IRS Notice 2006-52

Who is qualified to certify that an energy efficient lighting upgrade meets the Tax requirements for an accelerated tax deduction?
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.
Will the Interim Lighting Rules be replaced with the final rules requiring the lighting system upgrade to reduce the energy of the entire building by 16-2/3%?
No. The interim lighting rules will still be applicable through the end of 2007. 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.

Is the equation listed in the original IRS guidance document for the interim lighting rules, 100 - 6-2/3 x (40 - X%) correct? It appears to provide a much lower tax deduction than listed in the lighting assistance calculator.
No. It was not correct. IRS has corrected the equation in the June 26, IRS Bulletin. It is now: 100 - 3-1/3 x (40 - X%).

Is the performance system rating method and associated approved software required using the interim lighting rules?
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.

If using the whole building performance method, where can approved software be obtained?
The Department of Energy will create and maintain a public list of software that may be used for the performance method at:

Was Bi-level lighting further defined?
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.

Was the deduction for non-profit government buildings further defined?
Yes. In March of 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.