Lighting upgrades are a fairly low-risk investment for any commercial properties that can result in substantial energy savings. A few effective strategies for energy efficient lighting systems include updating fixtures, utilizing daylight, and installing lighting controls.
What many property owners and managers don’t realize is that many electric lights generate an inordinate amount of heat, which can result in not only using energy to power the lighting but increased energy usage to cool the building. Implementing a well designed LED lighting strategy can result in decreased cooling costs and can allow the property owner to specify more efficient lighting and HVAC equipment as a part of a whole-building design.
Relative to the lighting deduction, a sliding scale has been established which provides a $.30 per square foot deduction for a 25% reduction in lighting energy use (based on standards established by ASHRAE 90.1-2001) up to $.60 per square foot for a 40% reduction. For example: IRS interim lighting rules require bi-level switching in certain areas; but the positive news for hotel property owners is that bi-level switching is not required in guest rooms, store rooms, restrooms, public lobbies and garages. Interim lighting rules also require certification by a qualified third-party.
Section 179-D of the Internal Revenue Code pertains to the energy-efficient commercial buildings deduction, also referred to as the “EPACT” deduction after the Energy Policy Act of 2005. For eligible lighting projects, tax deductions of up to $.60 per square foot are achievable.
There are a couple of accounting issues we’d like to raise, based on research from a large accounting firm done in the first quarter of 2013, but please: do not let us have the last word on accounting advice – consult your own advisor.
First, historically, there was no question that light bulbs were expensable items. The question we had was: If a LED bulb has a stated useful life of 5, 7, or even 10 years (based on 50,000 hours, or even more), would it still be considered expensable?
The response we received from the accounting firm was that they could find no specific reference that a LED bulb should be considered a fixed asset, so their conclusion was that the client should act consistent with their own capitalization policy. In other words, if you have historically expensed light bulbs, and there is nothing new in the Internal Revenue Code to suggest otherwise, then continue to expense light bulbs.
Second, the Tax Relief Act of 2010, signed into law December 17, 2010, provides for 100% bonus depreciation for qualified improvements made before 12-31-11. The accounting firm believes that new LED light fixtures, which normally would be depreciable over a five to seven year period, would qualify for the 100% depreciation.
Our takeaway from these two accounting items is that businesses have a historically unique window in which both retrofit and new fixture items can pass through their P&L as expense items in 2012.
We are not tax experts, so you are encourage to speak to your tax advisor(s).