Using EPAct Incentives to Enhance New Mandatory Building Energy Disclosure Requirements

Tax advisors need to understand the substance of rapidly expanding mandatory building energy rules and use the Energy Policy Act (EPAct) to help their clients achieve above average reporting status. Beginning in 2007 with California Assembly Bill 1103, there has been a fast growing national trend for jurisdictions to require commercial buildings to benchmark their energy use and for the information to be disclosed to members of the public. In these cities, and perhaps nationwide, the new energy benchmarking laws will cause energy use to be factored into the sale or lease markets, which may cause buildings both affected and not by the new laws to hit benchmarking standards in order to stay competitive. Once improving energy use, building owners and tenants should reduce energy levels to where they can receive immediate large EPAct tax deductions.

The EPAct Tax Opportunity

Pursuant to EPAct Section 179D, commercial building owners or tenants making qualifying energy-reducing investments can obtain immediate tax deductions of up to $1.80 per square foot.

If the building project doesn't qualify for the maximum $1.80 per square foot immediate tax deduction, there are tax deductions of up to 60 cents per square foot for each of the three major building subsystems: lighting, HVAC and the building envelope. The building envelope is every item on the building’s exterior perimeter that touches the outside world including roof, walls, insulation, doors, windows and foundation.

Commercial Energy Benchmarking Laws

Five major jurisdictions in the United States have passed commercial energy benchmarking laws since 2007. Those jurisdictions are the State of California, Washington D.C., Austin, Texas, New York City, New York and Seattle, Washington. These laws will eventually impact millions of buildings around the country. For example, the New York City law is expected to impact over 1 million buildings alone. All of these laws will be at least partially implemented by June 2011, and all of them at the minimum require commercial buildings of at least 50,000 square feet to benchmark and disclose energy use. The following chart illustrates the magnitude of potential EPAct tax benefits available at various square footages starting at the 50,000 square feet minimum:

Commercial Properties - Potential EPAct Tax Deductions

See Table

Therefore, even the smallest buildings that may be affected by the benchmarking laws can potentially obtain immediate EPAct tax deductions of $90,000.

To complete the benchmarking process, each jurisdiction requires buildings to use the EPA’s Portfolio Manager to benchmark energy use in accordance with an Energy Star rating system. The Portfolio Manager is free to use and is available at The software generates an Energy Star score for individual buildings based on factors such as past utility bills, square footage, building area that is heated/air conditioned and weekly operating hours. The score is out of 100 and represents the percentage of buildings, with similar operations, for which it has more efficient energy use than. For example, a score of 75 indicates that the building performs better than 75% of its peers. A score of 75 makes the building eligible for the Energy Star, and is also a typical target used for benchmarking. Once reducing energy use to the benchmarking levels, building owners and tenants may already be in position to take large immediate EPAct tax deductions, or only have to make relatively small energy use reduction investments to get the benefits. Aside from the above similarities, the benchmarking laws tend to vary by jurisdiction. There are three major areas of differences between the benchmarking laws, the type of disclosure required, whether or not smaller government owned buildings are required to benchmark, and the method of the law’s implementation.


In general, there are two forms of disclosure required by the benchmarking laws. New York City and Washington D.C. require general public disclosure of a building’s energy benchmarking numbers. Austin, Seattle and California only require disclosure to current and prospective purchasers or tenants. Because in New York City and Washington D.C. the energy benchmarking information will be readily available to the public, these cities are the most likely to have energy benchmarking factor into the commercial building sale and lease markets the quickest. Those cities would also be likely to quickly have many buildings in position to qualify for EPAct tax benefits. Tax advisors would be wise to suggest that their clients retrofit their buildings before mandated energy-use disclosure.

Government Owned Building Distinction

Under the energy benchmarking laws, city owned buildings in both New York City and Washington D.C. are distinguished from privately owned buildings. As opposed to privately owned buildings over 50,000 square feet, which under full implementation will be required to benchmark and disclose, in both cities, city owned buildings only larger than 10,000 square feet are required to benchmark and disclose energy use. Public buildings present unique EPAct tax deduction opportunities because the architects and engineers of the buildings are allowed to claim the tax deductions.

Benchmarking Law Implementation Scheme

The new energy benchmarking laws are being implemented in two ways. New York City and Austin require all buildings governed by the new laws to conform to the law as of the date it takes effect. Washington D.C., Seattle and California all apply some sort of phase-in scheme, where only the largest subset of buildings are effected by the law as of the date that the law takes effect. Then, each year smaller buildings will be affected by the law until all buildings over a certain square footage have to comply with the benchmarking law. However, because of the effect that benchmarking by the largest buildings will have on the market for buying and leasing commercial buildings, the smaller buildings may find it advantageous to benchmark energy use, before their mandatory disclosure date, in order to compete and thus, as said earlier would be wise to reduce energy use enough to receive between a $1.20 and $1.80 per square foot tax deduction.

The following table summarizes some of the key elements of the first 5 benchmarking laws:

Energy Benchmarking Laws

See Table

Integrating Benchmarking & EPAct Tax Incentives


The maximum Section 179D lighting tax deduction requires a 40% wattage reduction compared to ASHRAE 2001. Achieving these wattage percentile targets is exactly what a building will need to do to achieve or maintain a 75% status in the lighting benchmarking area. Those buildings that use extremely low wattage interior applications such as LED lighting or induction lighting should be able to leapfrog into the top quartile for bench marked lighting energy usage.

The following chart shows the wattage per square foot lighting required in order to get EPAct tax lighting deductions in typical commercial spaces:

Typical 50,000 Sq Ft City Properties - Lighting Wattage per Sq Ft Targets

See Table


The key to achieving top quartile performance is upgrading to energy efficient HVAC at the EPAct tax deduction level. The section 179D HVAC tax deduction requires at least a 16 2/3's % total building energy cost reduction from HVAC alone. Although this requires a very efficient HVAC system, so few buildings in the country are at that level that achieving the tax deduction result will clearly place buildings into the top 75 to 100 energy performance benchmarking quartile. HVAC is generally expensive but often making the incremental investment, stepping up to a more efficient system, can be the better economic decision if utility rebates and EPAct tax deductions are part of the integrated decision process.

Private Efforts to Encourage Benchmarking

Recently, the Deutsche Bank Foundation financed the creation of a public database of several hundred retrofitted buildings in New York City1. Appearing in this database will be advantageous for any building owner looking to sell or lease their building at the most competitive price. Therefore, by installing energy efficient lighting and HVAC, a building in New York City can satisfy the new benchmarking law, appear on the retrofitted buildings list and immediately save up to $1.80 in EPAct tax deductions all at once.


Although at first glance the new commercial energy benchmarking laws may seem to be a burden on building owners and tenants, the laws actually provide a great opportunity to reduce energy costs and take large tax deductions. Most building owners and particularly landlords with tenants do not want to find themselves obligated to publicly report an energy inefficient building. Building owners and tenants may be able to achieve energy efficient status and qualify for EPAct tax deductions while reducing energy use simply to the benchmarking levels or just a little further. Even though these laws are currently in place in only five jurisdictions, it is predicted that more jurisdictions are likely to pass similar laws. In addition, because several of the largest American cities are affected by these benchmarking laws (e.g. New York City, Los Angeles, Washington D.C.), the effect of forced benchmarking on the commercial building sale and lease markets will likely have a wide-sweeping national effect since many large companies either have offices of their own in one of the cities or are in competition with companies that have offices in these cities. This is likely to encourage energy use benchmarking compliance and disclosure throughout the country, which in turn may cause a nationwide “race to the top” for efficient energy use. Informed companies will use EPAct to accelerate the process, cutting energy cost and improving energy efficiency, while obtaining EPAct tax benefits.


1 - See Julie Satow, Showing the Benefits of ‘Green’ Retrofits, New York Times, June 1, 2010,

Article Citation list