Lighting accounts for over 70% of all retrofits and remodels, and the utility and other rebates can be substantial, especially when combined with the benefits of EPAct and the energy savings. The decision to relight or remodel a property is no longer one of aesthetics. The decision is now one of how much money do you want to save and how you want to save it. The case examples at the end of this article will show you how much you can save.
Many of the economic benefits are realized through tax deductions and other tax strategies; you should not rely on your lighting installer to help you navigate these tricky waters. We offer for your review, the list of major benefits, and how you can use them to save you money. ETS also offers the following advice: consult your tax professional. While Bubba, the lighting guy, may be excellent at replacing your ballast, he probably knows little to nothing about your tax situation.
What are the economic benefits for relighting?
EPAct – The Energy Policy Act of 2005 provides for a Federal Tax Deduction of $0.60 per square foot for putting in energy efficient lighting and the associated controls. You have a certification completed and the benefits are a simple line item adjustment to your tax returns. A 200,000 square foot warehouse will generate $120,000 in tax deductions when re-done properly.
Utility Rebated – Just the same way you get a rebate for buying a new energy efficient refrigerator, you are also entitled to rebates from the Utility for energy efficient lighting.
Energy Savings – Simply put, a new lighting system can reduce the power usage by 50%. With energy costs scheduled to DOUBLE in some areas over the next 5 years, you can see how important these savings are
1245/1250 – When a renovation is completed, some of the assets may be considered personal property by the IRS. These assets qualify for Bonus Depreciation.
Abandonment – When a property undergoes renovation, such as a relighting or new HVAC system, the old systems are abandoned for accounting purposes. This means that the net book value of the asset is written off as a loss (i.e. taken as a tax deduction). This deduction can provide significant economic benefit to the property owner.
How does this all work?
The IRS bifurcates assets in to two categories, 1245 and 1250, in essence separating assets into buckets based on their lives. Lighting by IRS definition is a 1250 category asset and has an accounting life of 39 years. To qualify for accelerated depreciation (and the one year bonus depreciation) the asset must have a life of 20 years or less.
The lighting 1245/1250 definitions are below, as is the related information on the bonus depreciation. I underlined the important areas.
- Electrical – Light Fixtures – Interior 1250 Includes lighting such as recessed and lay-in lighting, night lighting, and exit lighting, as well as decorative lighting fixtures that provide substantially all the artificial illumination in the building or along building walkways. For emergency and exit lighting, see Fire Protection & Alarm Systems. Building or Building Component – 39 Years Electrical
- Light Fixtures – Interior – 1245 Light fixtures, such as neon, track lighting, or grow lights which are decorative in nature and not necessary for the operation or maintenance of the building. If the decorative lighting were turned off, the other sources of lighting would provide sufficient light for operation or maintenance of the building. If the decorative lighting is the primary source of lighting, then it is section 1250 property. Personal Property With No Class Life – 7 Years
The federal Economic Stimulus Act of 2008, enacted in February 2008, included a 50% first-year bonus depreciation (26 USC § 168(k)) provision for eligible renewable-energy systems acquired and placed in service in 2008. This provision was extended (retroactively for the entire 2009 tax year) under the same terms by The American Recovery and Reinvestment Act of 2009, enacted in February 2009. Bonus depreciation was renewed again in September 2010 (retroactively for the entire 2010 tax year) by the Small Business Jobs Act of 2010 (H.R. 5297).
In December 2010 the provision for bonus depreciation was amended and extended yet again by The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853). Under these amendments, eligible property placed in service after September 8, 2010 and before January 1, 2012 qualifies for 100% first-year bonus depreciation. For 2012, bonus depreciation is still available, but the allowable deduction reverts from 100% to 50% of the eligible basis.
To qualify for bonus depreciation, a project must satisfy these criteria: the property must have a recovery period of 20 years or less under normal federal tax depreciation rules;
- The original use of the property must commence with the taxpayer claiming the deduction;
- The property generally must have been acquired during the period from 2008 – 2012; and
- The property must have been placed in service during the period from 2008 – 2012.
If property meets these requirements, the owner is entitled to deduct a significant portion of the adjusted basis of the property during the tax year the property is first placed in service. As noted above, for property acquired and placed in service after September 8, 2010 and before January 1, 2012, the allowable first year deduction is 100% of the adjusted basis. For property placed in service from 2008 – 2012, for which the “placed in service date” does not fall within this window, the allowable first-year deduction is 50% of the adjusted basis. In the case of a 50% first year deduction, the remaining 50% of the adjusted basis of the property is depreciated over the ordinary MACRS depreciation schedule. The bonus depreciation rules do not override the depreciation limit applicable to projects qualifying for the federal business energy tax credit. Before calculating depreciation for such a project, including any bonus depreciation, the adjusted basis of the project must be reduced by one-half of the amount of the energy credit for which the project qualifies.
For 2011 ONLY and for selected leased properties ONLY, there is a limited time benefit that is listed below. Engineered Tax Services recommends you have some confirmation of your renovations completed to verify that only qualifying properties were taken as a write-off.
Qualified Leasehold Improvement Property. An improvement to an interior portion of nonresidential real property (whether or not depreciated under MACRS) by a lessor or lessee under or pursuant to a lease may qualify for bonus depreciation. The improvement must be placed in service more than three years after the building was first placed in service (i.e., the building must be more than three years old). The lessor and lessee may not be related persons. Expenditures for (a) the enlargement of a building, (2) any elevator or escalator, (3) any structural component that benefits a common area, or (4) the internal structural framework of the building do not qualify ( Code Sec. 168(k)(3)).
From EPAct to Abandonment and Utility rebates, the economics of a lighting retrofit have never looked better. To achieve these benefits there are some tax and compliance issues that you need to address. The EPAct tax deductions and the 1245/1250 analysis require a level of tax and engineering expertise.
Note: 179D Energy Efficient property does not qualify for Bonus Depreciation.
If you have a question about this article or would like to discuss your tax lighting deduction options, please contact the Author, Don McDougall, Director, ph:213.280.2266 or email: [email protected]