SECTION 2. BACKGROUND

.01 In General . Section 1331 of the Energy Policy Act of 2005, Pub. L. No. 109–58, 119 Stat. 594 (2005), enacted § 179D of the Code, which provides a deduction with respect to energy efficient commercial buildings. Section 179D(a) 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 1, 2008. (See section 2.02 of this notice.) Sections 179D(d)(1) and 179D(f) allow a deduction to a taxpayer for part or all of the cost of certain partially qualifying commercial building property that the taxpayer places in service after December 31, 2005, and before January 1, 2008. (See sections 2.03, 2.04, and 2.05 of this notice.) For purposes of this notice partially qualifying commercial building property is property that would be energy efficient commercial building property but for the failure to achieve the 50-percent reduction in energy and power

costs required under section 2.02(1)(c) of this notice.

.02 Energy Efficient Commercial Build- ing Property .

(1) In General . Energy efficient commercial building property is depreciable property that satisfies each of the following conditions:

(a) The property is installed on or in any building that is located in the United States and is within the scope of Standard 90.1–2001. (See section 5.02 of this notice for the description of buildings within the scope of Standard 90.1–2001 and section 5.06 of this notice for the complete description of Standard 90.1–2001.)

(b) The property is installed as part of— (i) the interior lighting systems, (ii) the heating, cooling, ventilation, and hot water systems, or

(iii) the building envelope. (c) It is certified that the interior lighting systems, heating, cooling, ventilation, and hot water systems, and building envelope that have been incorporated into the building, or that the taxpayer plans to incorporate into the building subsequent to the installation of such property, will reduce the total annual energy and power costs with respect to combined usage of the building’s heating, cooling, ventilation, hot water, and interior lighting systems by 50 percent or more as compared to a Reference Building that meets the minimum requirements of Standard 90.1–2001. The required 50-percent reduction must be accomplished solely through energy and power cost reductions for the heating, cooling, ventilation, hot water, and interior lighting systems. Reductions in any other energy uses, such as receptacles, process loads, refrigeration, cooking, and elevators, are not taken into account in determining whether the 50-percent reduction is achieved. (2) Maximum Amount of Deduction . (a) In General . The deduction for the cost of energy efficient commercial building property installed on or in a building shall not exceed the excess (if any) of—

(i) the product of $1.80 and the square footage of the building, over

(ii) the aggregate amount of the § 179D deductions allowed with respect to the building for all prior taxable years.

(b) Application to Multiple Taxpayers . If two or more taxpayers install energy efficient commercial building property on or in the same building, the aggregate amount of the § 179D deductions allowed to all such taxpayers with respect to the building shall not exceed the amount determined under section 2.02(2)(a) of this notice.

.03 Partially Qualifying Property: En- ergy Efficient Lighting Property .

(1) In General . Energy efficient lighting property is partially qualifying property, within the meaning of section 2.01 of this notice, that is subject to either the permanent rule in section 2.03(1)(a) of this notice or the interim rule in section 2.03(1)(b) of this notice. (a) Permanent Rule . Partially qualifying property is subject to the permanent rule if it is installed as part of the interior lighting systems of a building and it is certified that the interior lighting systems that have been incorporated into the building, or that the taxpayer plans to incorporate into the building subsequent to the installation of such property, will reduce the total annual energy and power costs with respect to combined usage of the building’s heating, cooling, ventilation, hot water, and interior lighting systems by 16 ² /3 percent or more as compared to a Reference Building that meets the minimum requirements of Standard 90.1–2001. The required 16 ² /3-percent reduction must be accomplished solely through energy and power cost reductions for the heating, cooling, ventilation, hot water, and interior lighting systems. Reductions in any other energy uses, such as receptacles, process loads, refrigeration, cooking, and elevators, are not taken into account in determining whether the 16 ² /3-percent reduction is achieved.

(b) Interim Rule . Partially qualifying property, within the meaning of section 2.01 of this notice, is subject to the interim rule if it is not subject to the permanent rule in section 2.03(1)(a) of this notice, if it is installed as part of the interior lighting systems of a building before the date on which final regulations under section 179D are published in the Federal Register, and it is certified that the interior lighting systems that have been incorporated into the build

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ing, or that the taxpayer plans to incorporate into the building,—

(i) Achieve a reduction in lighting power density of at least 25 percent (50 percent in the case of a warehouse) of the minimum requirements in Table 9.3.1.1 or Table 9.3.1.2 (not including additional interior lighting power allowances) of Standard 90.1–2001;

(ii) Have controls and circuiting that comply fully with the mandatory and prescriptive requirements of Standard 90.1–2001; (iii) Include provision for bi-level switching in all occupancies except hotel and motel guest rooms, store rooms, restrooms, and public lobbies; and

(iv) Meet the minimum requirements for calculated lighting levels as set forth in the IESNA Lighting Handbook, Performance and Application, Ninth Edition, 2000. (2) Maximum Amount of Deduction . (a) Property subject to the permanent rule .

(i) In General . If the energy efficient lighting property installed on or in a building is subject to the permanent rule in section 2.03(1)(a) of this notice, the deduction for the cost of the property shall not exceed the excess (if any) of—

(A) the product of $0.60 and the square footage of the building, over

(B) the aggregate amount of the § 179D deductions allowed with respect to energy efficient lighting property installed on or in the building for all prior taxable years.

(ii) Application to Multiple Taxpayers . If two or more taxpayers install energy efficient lighting property on or in the same building and the property is subject to the permanent rule in section 2.03(1)(a) of this notice, the aggregate amount of the § 179D deductions allowed to all such taxpayers with respect to the building shall not exceed the amount determined under section 2.03(2)(a)(i) of this notice. (b) Property subject to the interim rule . (i) In General . If the energy efficient lighting property installed on or in a building is subject to the interim rule in section 2.03(1)(b) of this notice, the deduction for the cost of the property is equal to the applicable percentage of the deduction that would be allowed if the property were subject to the permanent rule. In addition, the deduction for the cost of the property shall not exceed the excess (if any) of—

(A) the applicable percentage of the product of $0.60 and the square footage of the building, over

(B) the aggregate amount of the § 179D deductions allowed with respect to energy efficient lighting property installed on or in the building for all prior taxable years.

(ii) Applicable percentage . If the interior lighting systems of the building achieve a reduction in lighting power density of at least 40 percent, the applicable percentage for the building is 100 percent. If the interior lighting systems of the building achieve a reduction in lighting power density of less than 40 percent, the applicable percentage for the building is 100 percent reduced at a rate of 3 ¹ /3 percentage points per percentage point by which 40 percent exceeds the percentage reduction in lighting power density. For example, if the interior lighting systems achieve a reduction in lighting power density of 32.5 percent, the applicable percentage is 75 percent (100 - (3 ¹ /3 x (40 - 32.5))).

(iii) Application to Multiple Taxpayers . If two or more taxpayers install energy efficient lighting property on or in the same building and the property is subject to the interim rule in section 2.03(1)(b) of this notice, the aggregate amount of the § 179D deductions allowed to all such taxpayers with respect to the building shall not exceed the amount determined under section 2.03(2)(b)(i) of this notice. .04 Partially Qualifying Property: En- ergy Efficient Heating, Cooling, Ventila- tion, and Hot Water Property .

(1) In General . Energy efficient heating, cooling, ventilation, and hot water property is partially qualifying property, within the meaning of section 2.01 of this notice, that satisfies both of the following conditions:

(a) The property is installed as part of the heating, cooling, ventilation, and hot water systems of a building; and

(b) It is certified that the heating, cooling, ventilation, and hot water systems that have been incorporated into the building, or that the taxpayer plans to incorporate into the building subsequent to the installation of such property, will reduce the total annual energy and power costs with respect to combined usage of the building’s heating, cooling, ventilation, hot water, and interior lighting systems by 16 ² /3 percent or more as compared to a Reference Building that meets the mini

mum requirements of Standard 90.1–2001. The required 16 ² /3-percent reduction must be accomplished solely through energy and power cost reductions for the heating, cooling, ventilation, and hot water systems. Reductions in any other energy uses, such as receptacles, process loads, refrigeration, cooking, and elevators, are not taken into account in determining whether the 16 ² /3-percent reduction is achieved.

(2) Maximum Amount of Deduction . (a) In General . The deduction for the cost of energy efficient heating, cooling, ventilation, and hot water property installed on or in a building shall not exceed the excess (if any) of—

(i) the product of $0.60 and the square footage of the building, over

(ii) the aggregate amount of the § 179D deductions allowed with respect to energy efficient heating, cooling, ventilation, and hot water property installed on or in the building for all prior taxable years.

(b) Application to Multiple Taxpayers . If two or more taxpayers install energy efficient heating, cooling, ventilation, and hot water property on or in the same building, the aggregate amount of the § 179D deductions allowed to all such taxpayers with respect to the building shall not exceed the amount determined under section 2.04(2)(a) of this notice. .05 Partially Qualifying Property: En- ergy Efficient Building Envelope Property .

(1) In General . Energy efficient building envelope property is partially qualifying property, within the meaning of section 2.01 of this notice, that satisfies both of the following conditions:

(a) The property is installed as part of the building envelope of a building; and

(b) It is certified that the building envelope that has been incorporated into the building, or that the taxpayer plans to incorporate into the building subsequent to the installation of such property, will reduce the total annual energy and power costs with respect to combined usage of the building’s heating, cooling, ventilation, hot water, and interior lighting systems by 16 ² /3 percent or more as compared to a Reference Building that meets the minimum requirements of Standard 90.1–2001. The required 16 ² /3-percent reduction must be accomplished solely through energy and power cost reductions for the heating, cooling, ventilation, hot

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(2) Energy Efficient Lighting Property . In computing energy and power cost savings for purposes of section 2.03 (relating to energy efficient lighting property), the Proposed Building is a building that contains the interior lighting systems that have been incorporated (or that the taxpayer plans to incorporate) into the taxpayer’s building but that is otherwise identical to the Reference Building.

(3) Energy Efficient Heating, Cooling, Ventilation, and Hot Water Property . In computing energy and power cost savings for purposes of section 2.04 (relating to energy efficient heating, cooling, ventilation, and hot water property), the Proposed Building is a building that contains the heating, cooling, ventilation, and hot water systems that have been incorporated, or that the taxpayer plans to incorporate, into the taxpayer’s building but that is otherwise identical to the Reference Building.

(4) Energy Efficient Building Envelope Property . In computing energy and power cost savings for purposes of section 2.05 (relating to energy efficient building envelope property), the Proposed Building is a building that contains the building envelope that has been incorporated, or that the taxpayer plans to incorporate, into the taxpayer’s building but that is otherwise identical to the Reference Building.