114 
a condominium project substantially all of the 
units of which are used as residences. 
‘‘(4) BUILDING ENVELOPE COMPONENT.—The 
term ‘building envelope component’ means— 
‘‘(A) any sealant or insulation material or 
system which is specifically and primarily de-
signed to reduce the heat loss or gain or a 
dwelling when installed in or on such dwelling, 
‘‘(B) exterior windows (including sky-
lights), and 
‘‘(C) exterior doors. 
‘‘(5) MANUFACTURED HOMES INCLUDED.—For 
purposes of this section, the term ‘dwelling’ includes 
a manufactured home which conforms to Federal 
Manufactured Home Construction and Safety Stand-
ards (24 C.F.R. 3280). 
‘‘(g) BASIS ADJUSTMENT.—For purposes of this sub-
title, if a credit is allowed under this section for any ex-
penditure with respect to any property, the increase in the 
basis of such property which would (but for this sub-
section) result from such expenditure shall be reduced by 
the amount of the credit so allowed. 
‘‘(h) TERMINATION.—Subsection (a) shall not apply 
to qualified energy efficiency improvements installed after 
December 31, 2006.’’.
115 
(2) CONFORMING AMENDMENTS.— 
(A) Section 1016(a), as amended by this 
Act, is amended by striking ‘‘and’’ at the end 
of paragraph (32), by striking the period at the 
end of paragraph (33) and inserting ‘‘; and’’, 
and by adding at the end the following new 
paragraph: 
‘‘(34) to the extent provided in section 25D(g), 
in the case of amounts with respect to which a credit 
has been allowed under section 25D.’’. 
(B) The table of sections for subpart A of 
part IV of subchapter A of chapter 1, as 
amended by this Act, is amended by inserting 
after the item relating to section 25C the fol-
lowing new item: 
‘‘25D. Energy efficiency improvements to existing homes.’’. 
(3) EFFECTIVE DATES.— 
(A) IN GENERAL.—Except as provided by 
subparagraph (B), the amendments made by 
this subsection shall apply to property installed 
after December 31, 2005, in taxable years end-
ing after such date. 
(B) PARAGRAPH (2).—The amendments 
made by paragraph (2) shall apply to taxable 
years ending after December 31, 2005.
116 
SEC. 503. ENERGY EFFICIENT COMMERCIAL BUILDINGS DE-
DUCTION. 
(a) IN GENERAL.—Part VI of subchapter B of chap-
ter 1 (relating to itemized deductions for individuals and 
corporations) is amended by inserting after section 179B 
the following new section: 
‘‘SEC. 179C. ENERGY EFFICIENT COMMERCIAL BUILDINGS 
DEDUCTION. 
‘‘(a) IN GENERAL.—There shall be allowed as a de-
duction an amount equal to the cost of energy efficient 
commercial building property placed in service during the 
taxable year. 
‘‘(b) MAXIMUM AMOUNT OF DEDUCTION.—The de-
duction under subsection (a) with respect to any building 
for the taxable year and all prior taxable years shall not 
exceed an amount equal to the product of— 
‘‘(1) $2.25, and 
‘‘(2) the square footage of the building. 
‘‘(c) DEFINITIONS.—For purposes of this section— 
‘‘(1) ENERGY EFFICIENT COMMERCIAL BUILD-
ING PROPERTY.—The term ‘energy efficient commer-
cial building property’ means property— 
‘‘(A) which is installed on or in any build-
ing located in the United States, 
‘‘(B) which is installed as part of— 
‘‘(i) the interior lighting systems,
117 
‘‘(ii) the heating, cooling, ventilation, 
and hot water systems, or 
‘‘(iii) the building envelope, and 
‘‘(C) which is certified in accordance with 
subsection (d)(6) as being installed as part of 
a plan designed to reduce the total annual en-
ergy and power costs with respect to the inte-
rior lighting systems, heating, cooling, ventila-
tion, and hot water systems of the building by 
50 percent or more in comparison to a ref-
erence building which meets the minimum re-
quirements of Standard 90.1–2001 using meth-
ods of calculation under subsection (d)(2). 
A building described in subparagraph (A) may in-
clude any residential rental property, including any 
low-rise multifamily structure or single family hous-
ing property which is not within the scope of Stand-
ard 90.1–2001, but shall not include any qualified 
new energy efficient home (within the meaning of 
section 45J(d)(3)) for which a credit under section 
45J has been allowed. 
‘‘(2) STANDARD 90.1–2001.—The term ‘Stand-
ard 90.1–2001’ means Standard 90.1–2001 of the 
American Society of Heating, Refrigerating, and Air 
Conditioning Engineers and the Illuminating Engi-
118 
neering Society of North America (as in effect on 
April 2, 2003). 
‘‘(d) SPECIAL RULES.— 
‘‘(1) PARTIAL ALLOWANCE.— 
‘‘(A) IN GENERAL.—Except as provided in 
subsection (f), if— 
‘‘(i) the requirement of subsection 
(c)(1)(C) is not met, but 
‘‘(ii) there is a certification in accord-
ance with paragraph (6) that any system 
referred to in subsection (c)(1)(B) satisfies 
the energy-savings targets established by 
the Secretary under subparagraph (B) 
with respect to such system, then the re-
quirement of subsection (c)(1)(C) shall be 
treated as met with respect to such system, 
and the deduction under subsection (a) 
shall be allowed with respect to energy effi-
cient commercial building property in-
stalled as part of such system and as part 
of a plan to meet such targets, except that 
subsection (b) shall be applied to such 
property by substituting ‘$.75’ for ‘$2.25’. 
‘‘(B) REGULATIONS.—The Secretary, after 
consultation with the Secretary of Energy, shall
119 
establish a target for each system described in 
subsection (c)(1)(B) which, if such targets were 
met for all such systems, the building would 
meet the requirements of subsection (c)(1)(C). 
‘‘(2) METHODS
OF
CALCULATION.—The Sec-
retary, after consultation with the Secretary of En-
ergy, shall promulgate regulations which describe in 
detail methods for calculating and verifying energy 
and power consumption and cost, based on the pro-
visions of the 2005 California Nonresidential Alter-
native Calculation Method Approval Manual or, in 
the case of residential property, the 2005 California 
Residential Alternative Calculation Method Approval 
Manual. These regulations shall meet the following 
requirements: 
‘‘(A) In calculating tradeoffs and energy 
performance, the regulations shall prescribe the 
costs per unit of energy and power, such as kil-
owatt hour, kilowatt, gallon of fuel oil, and 
cubic foot or Btu of natural gas, which may be 
dependent on time of usage. If a State has de-
veloped annual energy usage and cost calcula-
tion procedures based on time of usage costs for 
use in the performance standards of the State’s 
building energy code before the effective date of
120 
this section, the State may use those annual en-
ergy usage and cost calculation procedures in 
lieu of those adopted by the Secretary. 
‘‘(B) The calculation methods under this 
paragraph need not comply fully with section 
11 of Standard 90.1–2001. 
‘‘(C) The calculation methods shall be fuel 
neutral, such that the same energy efficiency 
features shall qualify a building for the deduc-
tion under this section regardless of whether 
the heating source is a gas or oil furnace or an 
electric heat pump. The reference building for 
a proposed design which employs electric resist-
ance heating shall be modeled as using a heat 
pump. 
‘‘(D) The calculation methods shall provide 
appropriate calculated energy savings for design 
methods and technologies not otherwise credited 
in either Standard 90.1–2001 or in the 2005 
California Nonresidential Alternative Calcula-
tion Method Approval Manual, including the 
following: 
‘‘(i) Natural ventilation. 
‘‘(ii) Evaporative cooling.
121 
‘‘(iii) Automatic lighting controls such 
as occupancy sensors, photocells, and time-
clocks. 
‘‘(iv) Daylighting. 
‘‘(v) Designs utilizing semi-condi-
tioned spaces which maintain adequate 
comfort conditions without air conditioning 
or without heating. 
‘‘(vi) Improved fan system efficiency, 
including reductions in static pressure. 
‘‘(vii) Advanced unloading mecha-
nisms for mechanical cooling, such as mul-
tiple or variable speed compressors. 
‘‘(viii) The calculation methods may 
take into account the extent of commis-
sioning in the building, and allow the tax-
payer to take into account measured per-
formance which exceeds typical perform-
ance. 
‘‘(ix) On-site generation of electricity, 
including combined heat and power sys-
tems, fuel cells, and renewable energy gen-
eration such as solar energy. 
‘‘(x) Wiring with lower energy losses 
than wiring satisfying Standard 90.1–2001
122 
requirements for building power distribu-
tion systems. 
‘‘(3) COMPUTER SOFTWARE.— 
‘‘(A) IN GENERAL.—Any calculation under 
paragraph (2) shall be prepared by qualified 
computer software. 
‘‘(B) QUALIFIED COMPUTER SOFTWARE.— 
For purposes of this paragraph, the term 
‘qualified computer software’ means software— 
‘‘(i) for which the software designer 
has certified that the software meets all 
procedures and detailed methods for calcu-
lating energy and power consumption and 
costs as required by the Secretary, 
‘‘(ii) which provides such forms as re-
quired to be filed by the Secretary in con-
nection with energy efficiency of property 
and the deduction allowed under this sec-
tion, and 
‘‘(iii) which provides a notice form 
which documents the energy efficiency fea-
tures of the building and its projected an-
nual energy costs. 
‘‘(4) ALLOCATION OF DEDUCTION FOR PUBLIC 
PROPERTY.—In the case of energy efficient commer-
123 
cial building property installed on or in public prop-
erty, the Secretary shall promulgate a regulation to 
allow the allocation of the deduction to the person 
primarily responsible for designing the property in 
lieu of the public entity which is the owner of such 
property. Such person shall be treated as the tax-
payer for purposes of this section. 
‘‘(5) NOTICE
TO
OWNER.—Each certification 
required under this section shall include an expla-
nation to the building owner regarding the energy 
efficiency features of the building and its projected 
annual energy costs as provided in the notice under 
paragraph (3)(B)(iii). 
‘‘(6) CERTIFICATION.— 
‘‘(A) IN
GENERAL.—The Secretary shall 
prescribe the manner and method for the mak-
ing of certifications under this section. 
‘‘(B) PROCEDURES.—The Secretary shall 
include as part of the certification process pro-
cedures for inspection and testing by qualified 
individuals described in subparagraph (C) to 
ensure compliance of buildings with energy-sav-
ings plans and targets. Such procedures shall 
be comparable, given the difference between 
commercial and residential buildings, to the re-
124 
quirements in the Mortgage Industry National 
Accreditation Procedures for Home Energy 
Rating Systems. 
‘‘(C) QUALIFIED
INDIVIDUALS.—Individ-
uals qualified to determine compliance shall be 
only those individuals who are recognized by an 
organization certified by the Secretary for such 
purposes. 
‘‘(e) BASIS REDUCTION.—For purposes of this sub-
title, if a deduction is allowed under this section with re-
spect to any energy efficient commercial building property, 
the basis of such property shall be reduced by the amount 
of the deduction so allowed. 
‘‘(f) INTERIM RULES
FOR LIGHTING SYSTEMS.— 
Until such time as the Secretary issues final regulations 
under subsection (d)(1)(B) with respect to property which 
is part of a lighting system— 
‘‘(1) IN GENERAL.—The lighting system target 
under subsection (d)(1)(A)(ii) shall be a reduction in 
lighting power density of 25 percent (50 percent in 
the case of a warehouse) of the minimum require-
ments in Table 9.3.1.1 or Table 9.3.1.2 (not includ-
ing additional interior lighting power allowances) of 
Standard 90.1–2001.
125 
‘‘(2) REDUCTION IN DEDUCTION IF REDUCTION 
LESS THAN 40 PERCENT.— 
‘‘(A) IN GENERAL.—If, with respect to the 
lighting system of any building other than a 
warehouse, the reduction in lighting power den-
sity of the lighting system is not at least 40 
percent, only the applicable percentage of the 
amount of deduction otherwise allowable under 
this section with respect to such property shall 
be allowed. 
‘‘(B) 
APPLICABLE
PERCENTAGE.—For 
purposes of subparagraph (A), the applicable 
percentage is the number of percentage points 
(not greater than 100) equal to the sum of— 
‘‘(i) 50, and 
‘‘(ii) the amount which bears the same 
ratio to 50 as the excess of the reduction 
of lighting power density of the lighting 
system over 25 percentage points bears to 
15. 
‘‘(C) EXCEPTIONS.—This subsection shall 
not apply to any system— 
‘‘(i) the controls and circuiting of 
which do not comply fully with the manda-
tory and prescriptive requirements of
126 
Standard 90.1–2001 and which do not in-
clude provision for bilevel switching in all 
occupancies except hotel and motel guest 
rooms, store rooms, restrooms, and public 
lobbies, or 
‘‘(ii) which does not meet the min-
imum requirements for calculated lighting 
levels as set forth in the Illuminating Engi-
neering Society of North America Lighting 
Handbook, Performance and Application, 
Ninth Edition, 2000. 
‘‘(g) COORDINATION
WITH
OTHER
TAX
BENE-
FITS.— 
‘‘(1) NO
DOUBLE
BENEFIT.—No deduction 
shall be allowed under subsection (a) with respect to 
any building for which a credit under section 45J 
has been allowed. 
‘‘(2) SPECIAL RULE WITH RESPECT TO BUILD-
INGS WITH ENERGY EFFICIENT PROPERTY.—In any 
case in which a deduction under section 200 or a 
credit under section 25C has been allowed with re-
spect to property in connection with a building, the 
annual energy and power costs of the reference 
building referred to in subsection (c)(1)(C) shall be 
determined assuming such reference building con-
127 
tains the property for which such deduction or credit 
has been allowed. 
‘‘(h) REGULATIONS.—The Secretary shall promul-
gate such regulations as necessary— 
‘‘(1) to take into account new technologies re-
garding energy efficiency and renewable energy for 
purposes of determining energy efficiency and sav-
ings under this section, and 
‘‘(2) to provide for a recapture of the deduction 
allowed under this section if the plan described in 
subsection (c)(1)(C) or (d)(1)(A) is not fully imple-
mented. 
‘‘(i) TERMINATION.—This section shall not apply 
with respect to property placed in service after December 
31, 2010.’’. 
(b) CONFORMING AMENDMENTS.— 
(1) Section 1016(a) is amended by striking 
‘‘and’’ at the end of paragraph (33), by striking the 
period at the end of paragraph (34) and inserting ‘‘, 
and’’, and by adding at the end the following new 
paragraph: 
‘‘(35) to the extent provided in section 
179C(e).’’.
128 
(2) Section 1245(a) is amended by inserting 
‘‘179C,’’ after ‘‘179B,’’ both places it appears in 
paragraphs (2)(C) and (3)(C). 
(3) Section 1250(b)(3) is amended by inserting 
before the period at the end of the first sentence ‘‘or 
by section 179C’’. 
(4) Section 263(a)(1) of such Code is amended 
by striking ‘‘or’’ at the end of subparagraph (H), by 
striking the period at the end of subparagraph (I) 
and inserting ‘‘, or’’, and by inserting after subpara-
graph (I) the following new subparagraph: 
‘‘(J) expenditures for which a deduction is 
allowed under section 179C.’’. 
(5) Section 312(k)(3)(B) is amended by strik-
ing ‘‘section 179, 179A, or 179B’’ each place it ap-
pears in the heading and text and inserting ‘‘section 
179, 179A, 179B, or 179C’’. 
(c) CLERICAL AMENDMENT.—The table of sections 
for part VI of subchapter B of chapter 1 is amended by 
inserting after section 179B the following new item: 
‘‘179C. Energy efficient commercial buildings deduction.’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to property placed in service after 
the date of the enactment of this Act in taxable years end-
ing after such date.
129 
SEC. 504. CREDIT FOR RESIDENTIAL ENERGY EFFICIENT 
PROPERTY. 
(a) IN GENERAL.—Subpart A of part IV of sub-
chapter A of chapter 1 (relating to nonrefundable personal 
credits) is amended by inserting after section 25D the fol-
lowing new section: 
‘‘SEC. 25E. RESIDENTIAL ENERGY EFFICIENT PROPERTY. 
‘‘(a) ALLOWANCE OF CREDIT.—In the case of an in-
dividual, there shall be allowed as a credit against the tax 
imposed by this chapter for the taxable year an amount 
equal to the sum of the qualified Tier 1 and Tier 2 energy 
efficient building property expenditures made by the tax-
payer during such year. 
‘‘(b) LIMITATIONS.— 
‘‘(1) MAXIMUM
CREDIT.—The credit allowed 
under subsection (a) shall not exceed— 
‘‘(A) $300 for each Tier 2 electric heat 
pump water heater, 
‘‘(B) $300 for each Tier 2 natural gas, oil 
or propane furnace or hot water boiler installed 
in 2006 ($250 for equipment installed in 2007, 
$200 for equipment installed in 2008), 
‘‘(C) $200 for each Tier 1 natural gas, oil, 
or propane furnace, or hot water boiler installed 
in 2006 ($150 for equipment installed in 2007, 
$100 for equipment installed in 2008),
130 
‘‘(D) $300 for each Tier 2 natural gas, oil, 
or propane water heater, 
‘‘(E) $50 for each Tier 1 natural gas, oil, 
or propane water heater, 
‘‘(F) $50 for a Tier 1advanced main air 
circulating fan which is installed in a furnace 
with an Annual Fuel Utilization Efficiency of 
less than 92 percent, 
‘‘(G) $300 for each Tier 2 combination 
space and water heating system, 
‘‘(H) $50 for each Tier 1combination 
space and water heating system, 
‘‘(I) $250 for each Tier 2 geothermal heat 
pump, 
‘‘(J) $300 for each Tier 2 central air con-
ditioner or central heat pump ($200 for equip-
ment installed in 2008), and 
‘‘(K) $200 for each Tier 1central air con-
ditioner or central heat pump ($100 for equip-
ment installed in 2008). 
‘‘(2) SAFETY CERTIFICATIONS.—No credit shall 
be allowed under this section for an item of property 
unless such property meets the performance and 
quality standards, and the certification requirements 
(if any), which—
131 
‘‘(A) have been prescribed by the Secretary 
by regulations (after consultation with the Sec-
retary of Energy or the Administrator of the 
Environmental Protection Agency, as appro-
priate), 
‘‘(B) in the case of the energy efficiency 
ratio (EER) for property described in sub-
section (d)(6)(B)(i), (J) and (K)— 
‘‘(i) require measurements to be based 
on published data which is tested by manu-
facturers at 95 degrees Fahrenheit, 
‘‘(ii) do not require ratings to be 
based on certified data of the Air Condi-
tioning and Refrigeration Institute, and 
‘‘(iii) are in effect at the time of the 
acquisition of the property. 
‘‘(c) CARRYFORWARD OF UNUSED CREDIT.—If the 
credit allowable under subsection (a) exceeds the limita-
tion imposed by section 26(a) for such taxable year re-
duced by the sum of the credits allowable under this sub-
part (other than this section and section 25D), such excess 
shall be carried to the succeeding taxable year and added 
to the credit allowable under subsection (a) for such suc-
ceeding taxable year. 
‘‘(d) DEFINITIONS.—For purposes of this section—