Tax Credits for LED Lights: The 179D Tax Deduction

With rising energy costs and increasing emphasis on sustainability, upgrading to energy-efficient systems not only benefits the environment but also offers significant financial incentives. The 179D tax deduction is a powerful tool for businesses looking to save on taxes while investing in energy efficiency. This guide breaks down everything you need to know about 179D tax credits, including eligibility, benefits, and practical steps to claim them.

What Is the 179D Tax Deduction?

The 179D Energy Efficient Commercial Buildings Deduction was introduced as part of the Energy Policy Act (EPAct) of 2005 to incentivize energy reductions in commercial properties. This tax deduction provides financial benefits for businesses that implement energy-efficient upgrades to lighting systems, building envelopes, or HVAC systems. Made permanent in 2021 as part of the Consolidated Appropriations Act, the deduction is a reliable incentive for energy-efficient investments.

Key Benefits of 179D

• Significant Tax Savings: Businesses can deduct up to $1.80-$1.88 per square foot for eligible projects.
• Encourages Sustainability: Supports environmental goals by reducing energy consumption.
• Retroactive Eligibility: Projects dating back to January 1, 2006, may qualify for deductions.
• Flexibility for Partial Deductions: Projects that don’t meet the full deduction criteria can still benefit.

Who Qualifies for the 179D Deduction?

The following building types may be eligible:

• Retail buildings
• Apartment buildings (four stories or higher)
• Office buildings
• Industrial buildings
• Warehouses
• Parking garages
• Government-owned buildings (deduction applies to the designer, not the owner)
• Public universities and libraries

Eligibility Checklist

To qualify for 179D deductions, projects must:

• Reduce energy and power costs by at least 50% compared to ASHRAE standards (ASHRAE 90.1-2007 or 90.1-2001 for projects placed in service before January 1, 2018).
• Include certified energy-efficient improvements by a licensed engineer or contractor.
• In the case of lighting-only projects, reduce energy costs by 25%.

Deduction Amounts and Partial Credits

The deduction amounts are as follows:

Full Deduction: $1.80-$1.88 per square foot for projects achieving a 50% energy cost reduction.

Partial Deductions: $0.60-$0.63 per square foot for specific improvements:

• Indoor lighting
• Building envelope enhancements
• HVAC system upgrades

For example, a 100,000-square-foot building achieving the full deduction could save $180,000 in taxes. Inflation adjustments ensure these benefits increase annually.

Practical Steps to Claim 179D

• Determine Eligibility: Confirm your building type and project scope.
• Conduct Energy Analysis: Compare your project’s energy savings to ASHRAE standards.
• Certification: Engage a licensed professional to certify the project’s compliance.
• Prepare Documentation: Maintain detailed records, including invoices, energy analysis reports, and certifications, for tax filing.
• File for the Deduction: Work with a tax professional to include the deduction in your tax return.

Additional Tax Incentives

Section 179

For smaller projects, Section 179 allows businesses to instantly expense up to $1,050,000 in qualified improvements. However, this deduction phases out for purchases exceeding $2,620,000.

Bonus Depreciation

Bonus depreciation enables businesses to immediately write off a percentage of qualified improvement property:

• 80% for property placed in service in 2023
• 60% for property placed in service in 2024
• Phases out completely by 2027

Asset Retirement

Businesses can also write off the remaining basis of replaced assets. For example, if a company replaces a $390,000 lighting system installed in 2008 with $290,000 of un-depreciated value, that remaining value can be deducted when the system is replaced.

State-Level Incentives

In addition to 179D, many states offer incentives for energy-efficient upgrades. Use the Database of State Incentives for Renewables & Efficiency (DSIRE) to explore opportunities in your area.

Real-World Examples

Industrial Warehouse Retrofit

An industrial warehouse retrofitted its 200,000-square-foot facility with LED lighting and high-efficiency HVAC systems. The project achieved a 55% energy reduction, qualifying for the full $1.80 deduction per square foot. Total tax savings: $360,000.

Office Building Lighting Upgrade

A 50,000-square-foot office building replaced its outdated lighting system with LED fixtures, reducing energy costs by 30%. The project qualified for the $0.60 partial deduction per square foot, saving $30,000 in taxes.

Resources and Tools

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
179D Commercial Tax Deduction

The OEERE also has a page that outlines tax deductions for commercial buildings.
https://www1.eere.energy.gov/buildings/publications/pdfs/corporate/bt_comm_tax_credit.pdf

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.
https://www.dsireusa.org/

Final Thoughts

The 179D tax deduction is an excellent incentive for businesses to invest in energy-efficient upgrades. By reducing energy costs and claiming substantial tax savings, you can enhance your bottom line while supporting sustainability. Ready to start? Consult with an energy expert or licensed professional to begin your project today.

Disclaimer: This article is for informational purposes only and does not constitute tax advice. Consult a tax professional for specific guidance.