EPAct Tax Savings for Lighting

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The EPAct ( Energy Policy Act of 2005) Tax savings for lighting encourages builders, architects, and engineers to install energy-saving alternatives, like LED lighting retrofits.

In return, tax deductions are offered if the building (new construction or remodelled project) meets the criteria to be categorized as an energy-efficient commercial property.

There are also partial tax deductions if individual lighting systems in the building meet the criteria specified in EPAct.

Accordingly, facility owners can reap immensely from tax deductions just by using energy-efficient lighting systems.

EPAct 179D is the section that covers tax deductions for commercial buildings.

How Did EPAct Come About?

President George W. Bush signed the Energy Policy Act of 2005 (EPAct 2005) into law on August 8, 2005.

At the time, EPAct 2005 was expected to cost the government $14.5 billion over 10 years, and as such, it was the largest overhaul of the national energy policy since 1992.

In 2018, President Trump also signed a package of tax extenders and as such, businesses who completed a lighting retrofit or plan on could benefit from tax deductions.

On the other hand, EPACT offers several energy conservation provisions that are mostly targeted at the lighting industry.

Notable among these provisions is the Energy Efficient Commercial Buildings Tax Deduction (Section 1331).

EPAct’s Energy Efficient Commercial Buildings Tax Deduction

This provision offers an immediate tax deduction of up to $1.80 per square foot.

The latter is offered for building investments that are able to attain the specified energy cost reductions beyond ASHRAE 90.1-2001 building energy code standards,

Similarly, there may be a maximum tax deduction of $1.80 per square foot, there are cases where 60 cents per square foot maximum tax deductions are offered for three types of building systems.

These building systems include:

  • Building envelope (roof, walls, windows, doors, etc.)
  • Interior lighting systems
  • Heating, cooling, ventilation, and hot water systems

EPAct 2005 (Section 1331) states:

“There shall be allowed as a deduction an amount equal to the cost of energy-efficient commercial building property placed in service during the taxable year.”

It is also worth noting that there are three possible tax deductions targeted at the provision: EPAct 2005’s Energy Efficient Commercial Buildings Tax Deduction

There are:

1. Commercial property

Here, a deduction up to $1.80 per square foot of space is offered for investment in energy-efficient commercial building property.

This investment can either be as part of new construction or renovation.

On the other hand, EPAct 2005 defined an “Energy-efficient property”  as a commercial building property that has been certified to reduce its total annual energy and power costs.

This reduction is set at least 50% less than a building satisfying the 90.1-2001 Standard.

2. Individual systems

EPAct 2005 requires the Secretary of the Treasury to create an energy-savings target for each qualifying energy-efficient lighting system including interior lighting, HVAC/hot water, building envelope.

This will ensure that if the commercial property will still be eligible for a partial tax deduction even if it does not qualify for the $1.80 per-square-foot tax deduction.

The latter is made possible since one or more of its qualifying systems may meet its energy-savings target.

Therefore, there can be partial deductions up to $.60 per square foot for interior lighting, $.60 for building envelope improvements, or $.60 for HVAC system upgrades.

3. Interim rules for lighting systems:

There are also interim rules for lighting systems, and in 2005, these rules were used until the Secretary of the Treasury issued the final regulations.

The final regulation was aimed at defining the above energy-savings target for lighting systems.

But what were these interim rules?

The interim rules “define the lighting system energy-savings target to be a lighting power density that is 25% to 40% lower than the minimum requirements.”

A lighting system automatically qualifies for $0.30 to $0.60 per-square-foot tax deduction if it meets this target.

Who Can Claim to Tax Deduction on Energy-efficient Lighting Systems

The owner of the commercial building is the one who claims tax deductions given that these buildings are privately owned.

In contrast, publicly owned buildings (owned by the federal, state, or local government) brought about the need for the Secretary of the Treasury to create regulation.

This regulation allows the “allocation of the deduction to the person primarily responsible for designing the property in lieu of the owner of such property. Such person will be treated as the taxpayer for purposes of this deduction.”

Some building owners give up on EPAct tax deductions because they are unaware of how close their building or the individual lighting systems is meeting the EPAct requirements.

That is why it is useful to hire a system designer who has a good understanding of the EPAct rules to ensure you obtain the most benefit.

Even when the designer does not understand the rules, they can still learn.

How Can the Deduction be Claimed?

In 2006, there were no clear rules to define the partial deduction based on the building system type.

Likewise, these projects were not certified.

The same is not the case in 2020 since clear rules on how to claim tax deductions on energy lighting has been made.

If your building is eligible, you need to drawup some paperwork to get tax deductions.

Facilities That Qualify for the Deduction?

EPAct tax incentives are available for properties placed in service between January 1, 2006, and December 31, 2020.

Much more, this tax deduction is allowable in the year in which the property is placed in service.

In 2005, multiple bills proposed that EPAct should be extended for one or more years.

Today, EPAct 179D specifically highlights the provision for commercial building:

  • Lighting retrofits that were completed in 2018 and 2019 are eligible for tax deductions
  • Lighting retrofits that were completed in 2020 are also eligible for tax deductions
  • Commercial buildings can get up to $1.80 per square foot as a tax deduction

Conclusion

EPAct tax savings for lighting encourage more energy-efficient buildings, which offers several benefits.

It can help a facility to reduce tax expenses, while at the same time ensure that efficient lighting systems are used.

These ones can also offer cost savings in the long run, enhance the productivity of workers, and are known to be environmentally friendly.

Therefore, a facility looking to reap these benefits has to meet the EPAct criteria in order to save money in the long run.

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