Why you cannot use accelerated depreciation to reduce the cost of your lighting project
The primary lighting of a parking garage has a life of 39 years, according to the IRS. It is referred to as a 1250 category asset. In order to be able to take advantage of “accelerated depreciation”, the asset MUST have a life of 20 years or less. The IRS defines this very clearly, you cannot break this rule. You CANNOT use accelerated depreciation on the general lighting for a parking lot.
Abandonment and how it can benefit you
When you put in new lighting, specifically when you replace the ballast and fixtures,you take out old assets. These old assets have a 39 year life just like the one you are putting in. That means that unless they are VERY old they still have a substantial book value. That residual value, the undepreciated dollars are a business expense. So just like any expenses they result in a tax deduction.
Often the ability to calculate the value of the abandoned assets can seem difficult. ETS has CPA’s, Attorneys and Certified Engineers on staff and do this every day.
What about LEDs?
LED’s are involving product, and they offer unique opportunity to save money and to add to the greening of a project.
For those of you not really in the lighting industry, this means the effective life of this asset is 86,000 hours and that it is maintenance free. If you assume the lights are on 24 hours a day, 7 days a week you get a life of 10 years. No replacement, no maintenance and half off your energy bill, a near prefect product for a parking garage.
This product shows the way things are going and represents a whole new generation of LED lighting products that are coming down the line.. When you take in to account the lower installation costs much of the net costs between an LED and conventional product simply goes away.
In a nut shell, if you use LED’s you can be assured you will (or should easily) meet your watts per square foot targets easily; and probably at a lower cost then you think.
How does a tax deduction differ from a tax credit?
The EPAct and Abandonment provide tax deductions as their benefit. You calculate the Net After Tax benefits of a tax deduction by multiplying the total deductions by your tax rate. So if you have a 30% federal tax rate, and you got $90,000 in tax deduction you have the equivalent of $30,000 in cash.
A pair of case examples:
500,000 square foot parking lot
$200,000 in capital costs for new lighting
$300,000 in EPAct deduction
$120,000 in Abandonment.
$320,000 in tax deductions, at a 30% tax bracket this project brought over $100,000 back to the property owner. (The EPAct Benefits are limited by the capitalized cost, the total benefits are $200,000 + $120,000)
1.2 million square foot parking structure with new LEDs
$1.9 million in capital cost
$720,000 in EPAct tax deductions
$500,000 in Abandonment
$1,220,000 in deductions, at a 35% tax rate this client saved $427,000
In these two examples (real life examples) you can see that EPAct combined with Abandonment provided some significant economic advantages. You are required to use a certified firm and individuals to prepare the EPAct certifications, that is a whole other article.