5 minute read
Lighting the Path to Savings
Utilizing Tax Deductions for Efficient Lighting Solutions
By Parker Allen
A significant percentage of lighting projects, if not a majority, fail to move forward because of financial issues. Many building owners can’t justify the upfront cost on a project, even though it will improve their lighting and save them money in the long run. To win more of these jobs, lighting contractors must find a way to make their bids palatable to their clients, who expect a reasonable payback period if they are to proceed with the project.
The mathematics involved in determining a payback period are relatively straightforward. A very simplified formula would be:
To reduce the payback period, then, the contractor must increase the annual savings conferred by the new lighting system and/or reduce the cost of the project.
Frank Austin and his team at TaxCentric Lighting specialize in finding tax deductions to help offset the cost of a lighting upgrade. A veteran of the lighting industry, he started his career with Genlyte (now part of Philips) over 25 years ago and has consulted on many energy-efficient and high-performance lighting systems for the retail, commercial and warehouse markets.
Austin's unique expertise bridges the gap by connecting lighting-specific federal tax benefits with asset management accounting and providing the necessary documentation to qualify for available deductions, ensuring compliance and maximizing financial benefits.
The federal government and many state governments incentivize energy-efficient upgrades by offering significant tax deductions for projects that can substantially reduce the overall project cost and improve the payback period. Austin cites four common tax deductions that can apply to lighting upgrade projects.
1. Partial Asset Disposition
When the existing lighting system is removed, abandoned or demolished during an upgrade, the remaining depreciation can be deducted. The lighting in a building is typically classified as a 39-year asset, meaning it depreciates gradually over that time period. For example, if the existing lighting system still has 29 years of depreciation left when it is removed, the building owner can write off the remaining 29 years at once upon disposal.
2. Bonus Depreciation and Qualified Improvement Property (QIP)
Newly installed lighting can qualify for bonus depreciation. Under the current federal tax code, if the new installation can be shown to be a qualified improvement to the property, it can be reclassified from a 39-year asset to a 15-year asset, making it eligible for bonus depreciation. Bonus rates can change from year to year, and for 2024, the rate is 60%. So for assets placed into service in 2024, up to 60% of the cost can be written off in the first year if eligible.
3. Accelerated Depreciation
Accelerated depreciation typically involves a detailed on-site forensic engineering study to reclassify building components into shorter-lived assets. This change in accounting method allows building owners to take larger deductions over a shorter period, enhancing cash flow by reducing current federal tax liabilities.
Buildings contain much more than just lighting. Austin and his team perform a thorough audit of the entire property, noting everything that is “glued to, screwed to, bolted to, and welded to” the building and preparing a detailed report that the building owner can use as documentation for reclassification of certain building assets, not just lighting.
The TaxCentric team has performed about 9,000 of these studies. Of these thousands of projects, the IRS has audited them on 21 of these projects. They passed all 21 audits. The key is thorough documentation and to follow the prescribed methodology outlined in the IRS Audit Techniques Guideline for cost segregation.
4. Energy Policy Act of 2005 (179D)
The Energy Policy Act of 2005 (EPAct) provides significant tax deductions for current energy-efficient building improvements that meet or exceed ANSI/ASHRAE Standard 90.1-2007.
Although typically not the easiest or most financially beneficial route for most for-profit building owners, tax deductions through EPAct are especially useful for tax exempt entities – government properties, non-profits, and Native American tribal nations. On these projects, the tax benefits can be assigned to the project manager or lighting designer of record.
Altogether, the combined savings from these tax deductions are significant. TaxCentric Lighting created the “LED Rule of 70™”. On average, a “TaxCentric” strategy will recover 70% of the turnkey cost of an LED lighting upgrade in the first year. This should be music to the ears of any contractor competing to win jobs and looking to differentiate themselves from competitors.
FUTURE OUTLOOK
As of now, tax incentives for qualified improvements to property are set to phase out gradually over the next few years. The current bonus depreciation rule allows 60% of the eligible cost of a lighting upgrade to be deducted in the first year. That number drops to 40% next year, 20% the following year, and then is phased out completely in 2027. It should be noted that this is subject to change, based on any future changes to tax code regulations.
Also on the horizon is the impending ban on double pin fluorescent lamps, set to take effect on January 1, 2029, although a handful of states have already implemented it. Austin estimates that two-thirds of buildings that are 11 years or older still operate fluorescent lamps, meaning the market for LED lighting upgrades is still robust.
In other words, strike while the proverbial iron is hot. Separate yourself from your competitors by leveraging these tax incentives to make your bids more competitive and win more projects.
For more information about TaxCentric Lighting, please visit their website.
