INTRODUCTION

You may be eligible for a tax deduction of up to

$1.80 per square foot for improving the energy

efficiency of your existing commercial buildings

or designing high efficiency into new buildings. 

The Energy Policy Act of 2005 includes a tax

deduction for investments in “energy-efficient

commercial building property” designed to

significantly reduce the heating, cooling, water

heating, and interior lighting energy cost of new

or existing commercial buildings. To be eligible,

the energy-efficient commercial building

property—such as a state-of-the-art lighting

system—must be placed in service between

January 1, 2006 and December 31, 2007.

To qualify for the full deduction, a building

owner or tenant must make investments

designed to reduce energy costs by 50% or

more. A partial deduction of $0.60 per square

foot is available for investments in one of three

systems—lighting; heating and cooling; or

building envelope—designed to reduce energy

costs by 16 and 2/3% (i.e., one-third of the 50%

requirement).

Tax deductions reduce your overall taxable

income with the value of the deduction

dependent on your tax bracket. Tax credits,

such as the ones provided for consumers in the

2005 Energy Policy Act, reduce the amount of

tax you owe dollar for dollar.

Who Can Benefit from the Deduction?

The person or organization that pays for

construction is generally the recipient of the

deduction. This is usually the building owner, but

for some HVAC or lighting efficiency projects, it

could be the tenant. 

For government-owned buildings, the person

primarily responsible for designing the building

or project may be able to claim the deduction.

How Can I Learn About the Final Rules?

Check the following websites regularly for

updates:

• www.energystar.gov/taxcredits 

The ENERGY STAR website will include updates

as more information becomes available, as well

as cost-effective solutions for improving the

energy efficiency of your buildings.

• www.efficientbuildings.org 

Sponsored by the Commercial Building Tax

Deduction Coalition, including business, trade,

government, energy efficiency, and other

groups convened by the National Electrical

Manufacturers Association.

• www.energytaxincentives.org 

Sponsored by the Tax Incentives Assistance

Project (TIAP),a coalition of public interest

non-profit, government, and other

organizations in the energy efficiency field.

STEPS TO TAKE

What can you do today to be ready?

1. Establish the energy use of your building(s)

and set a savings goal—Take the ENERGY

STAR Building Challenge

It is hard to manage what we do not measure.

With new easy to use energy use tracking tools,

you can establish the current energy use of your

building(s) and determine a reasonable energy

savings goal. This is the first step in many

effective energy savings programs, and will help

you identify the best opportunities to qualify for

the tax deduction.

Here’s how:

• Assess the current energy use of your

building(s) to establish a reference using EPA’s

national energy performance rating system

(www.energystar.gov/benchmark), a free online

tool that provides many types of buildings with

a score on a simple 1-to-100 scale, 1 being the

least efficient and 100 being the most. 

ENERGY STAR®, a U.S. Environmental Protection Agency

and U.S. Department of Energy program, helps us all 

save money and protect our environment through energy

efficient products & practices. For more information, visit

www.energystar.gov.

ARE YOU READY TO TAKE ADVANTAGE OF THE NEW

COMMERCIAL TAX INCENTIVES?
• Set appropriate goals for your business. EPA encourages

the establishment of a simple 10 percent savings goal to

start and your participation in the national ENERGY STAR

Building Challenge (www.energystar.gov/challenge). Many

organizations are finding this to be an effective savings

strategy. For individual buildings, you may find the

opportunity for much greater savings. The approximately

2,600 buildings across the country that have earned the

ENERGY STAR use about 40% less energy than typical

buildings—your lower-performing buildings may offer

savings of 50% or more. 

The table below is a general guide to interpreting the ratings

for your building(s). 

2. Design New Buildings to Achieve Top Energy Efficiency

To qualify for the tax incentive by demonstrating that the

code-regulated systems in a new building are designed to

save 50% of the energy cost, the design team must set a

clear goal, supported by good technology and carefully

integrated systems. EPA can help you set energy efficiency

targets for your new buildings at the design stage, showing

you how your building would rate if operating today.

Designing for top efficiency can now bring a tax benefit as

well as EPA’s “Designed to Earn the ENERGY STAR”

recognition and years of energy bill savings. 

Here’s how:

• Estimate the building’s total energy budget, and use EPA’s

Target Finder (www.energystar.gov/newbuildingdesign) to

compare it with existing buildings of a similar type. Make

sure the projected energy budget includes all energy

uses, not just those systems covered by the energy code.

• Apply for the “Designed to Earn the ENERGY STAR”

recognition for building designs with estimated energy

performance among the nation’s best. 

3. Improve Lighting Systems

Improving your lighting systems is one of the first steps EPA

recommends to increase the efficiency of your buildings—

whether you are retrofitting existing buildings or designing

new buildings. This is not only because lighting upgrades

are so cost-effective, but also because less heat is

generated from efficient lighting systems, affecting the

proper sizing of more capital-intensive heating and cooling

systems. As outlined in the ENERGY STAR Building Upgrade

Manual (www.energystar.gov/BldgManual), a strategy that

combines efficient lighting technologies, controls, and

appropriate light levels is the most effective approach to

meeting energy efficiency goals, including those required to

qualify for the partial tax deduction. 

You may qualify for a deduction of $0.30 per square foot if

the lighting system employs dual switching (ability to switch

roughly half the lights off and still have fairly uniform light

distribution) and reduces installed lighting power by at least

25% from values specified in specific cited tables in

ASHRAE Standard 90.1-2001. As lighting power reductions

climb from 25% to 40%, the deduction is increased

proportionally, up to $0.60 for a 40% power reduction (plus

the dual switching). This prorated credit does not apply to

warehouse lighting. For a typical building, a lighting power

reduction of 40% increases the building’s ENERGY STAR

rating by about 10 points. 

CONSULT A TAX PROFESSIONAL

The steps outlined above should help you improve the

efficiency of your buildings and prepare for the new tax

incentives. But only a tax attorney or other professional can

provide tax advice.

Buildings in the bottom half use more energy 

than typical buildings and offer the greatest 

energy savings opportunities. Earmark these 

facilities for major upgrades, such as HVAC, 

lighting, and envelope improvements.

Buildings in this quartile 

have room for improvement. 

Capital investments, 

including lighting upgrades, 

plus a focus on operations 

and maintenance schedules 

could yield significant 

savings.

Buildings in the top 

quartile are most likely 

to combine good 

design, equipment, and 

O&M. Additional 

investment and 

management geared 

towards continuous 

improvement can keep 

your buildings in shape 

and increase savings.

1 50 75 100

Low Efficiency High Efficiency

INVEST

INVESTIGATE

MAINTAIN

BUILDING RATING