Writing off the cost of a capital investment such as energy-efficient lighting is not new. Under current law, the cost of energy-saving investments must be capitalized and depreciated or amortized over time.

What is new, thanks to the Commercial Buildings Deduction, is the owner can now potentially write off the entire cost of the new lighting in the taxable year it is placed in service. When “placed in service” occurs is typically defined between the IRS and the taxpayer, but generally, the term defines the time at which the lighting is ready for its intended use. So it’s an accelerated tax deduction: If a cost item associated with installing new lighting is normally depreciated and claimed over a period of years, it can now be claimed in a single tax year.

Note that the Commercial Buildings Deduction is a tax deduction, not a tax credit. A tax credit is a direct dollar-for-dollar reduction of tax liability. A tax deduction is a cost subtracted from adjusted gross income when calculating taxable income; tax liability is therefore not reduced dollar for dollar, but in proportion to the taxpayer’s tax bracket.

The Commercial Buildings Deduction essentially has two levels depending on whether one wants to achieve savings targets for the entire building—interior lighting, HVAC/hot water and building envelope—or each of these systems individually. There is no limit to the amount of money available to fund this incentive.