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Tax Credit for LED Lights: the Complete Guide
There are many things to take into consideration when upgrading to energy-efficient LED lighting. The obvious benefits of an LED lighting retrofit, or an LED lighting upgrade project include:
- Reduction of energy consumption
- Reduction of your energy bill
- Decreased maintenance costs
- Increased office productivity
Do LED Lights Qualify for Tax Credit for My Business?
Additional considerations that often factor into a decision to move forward with an LED lighting project are tax incentives. There are tax credits for LED lighting at the federal and state level that can be used to reduce your tax burden and positively affect your business’ bottom line. We’ll break it down for you in this article.
179d: Energy Efficient Commercial Buildings Deduction
The Energy Policy Act (EPAct) was conceived in 2005. It took effect on January 1, 2006. It largely delivers tax savings for building owners who enhance energy savings with remodel projects or new construction. Section 179D defines tax deductions that are offered for commercial buildings. The objective of the Energy Policy Act was to provide incentives for energy reduction. The U.S. Department of Energy states that commercial buildings are accountable for half of all building energy consumption in the United States. 179D is designed to encourage businesses to make energy efficient improvements to their properties.
When federal legislators passed the bill that sent COVID pandemic related stimulus checks to millions of Americans, they also extended a tax benefit for businesses that perform energy-efficient building renovations. The Energy Efficient Commercial Buildings Deduction, also known as EPAct179D, 179D, or Section 179D, is part of a federal tax credit for LED lighting upgrades. It was made permanent when it became part of the 2021 Consolidated Appropriations Act. Projects like updated exterior or interior lighting systems may be eligible to claim the tax deduction. Before that, the deduction would end at the conclusion of each year. You had to wait to see if lawmakers passed the benefits for the next year.
Another important thing to know is that 179D is retroactive. Projects dating back to January 1, 2006 could be eligible for deductions.
For the purposes of this article, part of 179D can be seen as an energy efficient lighting tax credit. In other words, it is an LED lighting tax credit.
What are the Deductions?
The full tax deduction is set at $1.80-$1.88 per square foot of the upgraded space. In some cases, only parts of a project qualify, depending on the overall design and a variety of other factors.
Measures that affect any one of the lighting, the building envelope, or heating and cooling systems can be used to take partial deductions of up to $.60-.63 per square foot.
There are three different partial deductions:
- $.60-.63 per square foot for indoor lighting
- $.60-.63 per square foot for building envelope improvements
- $.60-.63 per square foot for HVAC system upgrades
For example, a 100,000 square foot building that is eligible for the full deductions could obtain a $180,000 tax credit. Under the new regulations, that credit will increase every year to account for inflation.
Who Qualifies for the Deductions?
The building owner qualifies for the deductions, unless the building is owned by the federal, state, or local government. In that case, the company responsible for the system’s design may take the deduction.
It applies to the following types of buildings:
- Retail buildings
- Apartment buildings that are four stories or higher
- Government-owned buildings
- Office buildings
- Industrial buildings
- Parking garages
- Public universities
To get the full deduction of $1.80-1.88 per square foot, energy and power costs need to be reduced by 50%. These costs are compared with the ASHRAE (American Society of Heating, Refrigerating, and Air Conditioning Engineers) Standard 90.1-2007 (or 90.1-2001 for buildings or systems placed in service before January 1, 2018). Project costs are compared to ASHRAE standards from two years before construction began. Partial deductions are also available based on the project and energy reduction. Energy reductions of 10% can still amount to large savings. In the case of lighting upgrades only, you must reduce the energy and power costs of a building by 25%.
Qualified Improvement Property (qip) and Section 179
LED lighting that is installed in nonresidential buildings might be eligible for an instant write-off utilizing 100% bonus depreciation or Section 179. The lighting must be installed after the building is in use. This permits companies to deduct the full cost of qualified investments right away, instead of distributing the deduction over a number of years.
Bonus depreciation is set to phase-out starting in 2023. The maximum immediate deductions are as follows:
- 80% for property placed in service in 2023
- 60% for property placed in service in 2024
- 40% for property placed in service in 2025
- 20% for property placed in service in 2026
Section 179 permits taxpayers to instantly expense up to $1,050,000 in property add-ons, which includes eligible improvement property. The deduction phases out dollar for dollar once a taxpayer’s total qualifying purchase exceeds $2,620,000.
Asset retirement relates to removing of an old asset on the books and taking a write-off for the remaining basis.
Example: A company installs all new lighting (including electrical work) in 2008 and spends $390,000. The price for commercial building upgrades in 2008 were depreciated across 39 years ($10,000 per year in this example). Therefore, in 2018, the company’s basis in the lighting is as follows: $390,000 (cost) minus 100,000 (accrued depreciation carried through 2018) equals $290,000
If the company once again upgrades to all new lighting in 2018, it can deduct the $290,000 outstanding basis on the previous lighting system that it installed.
Links for More Information
The United States Department of Energy, Office of Energy Efficiency & Renewable Energy (OEERE) has a web page with more details on the 179D Commercial Buildings Energy-Efficiency Tax Deduction
The OEERE also has a page that outlines tax deductions for commercial buildings.
There are also incentives for energy-efficient building projects at the state level. The Database of State Incentives for Renewables & Efficiency provides a tool that helps to find these incentives using an easy-to-use search feature.
Disclaimer: We do not provide tax advice, nor is this blog post meant to be seen as tax advice. The purpose of this article is purely informational based on information freely available online.
About the Author
Dwayne Kula is President of LED Lighting Supply. On any given day, Dwayne is writing content for the site and helps manage the marketing initiatives that are on-going. He has a Software Engineering degree and still dabbles in writing software for the company as needed. When not working, he enjoys spending time with his family, working out, playing the occasional game of golf and exploring New England.