Lighting accounts for over 70 percent of all retrofits and remodels. The decision to relight or remodel a commercial property is no longer solely about aesthetics. The EPAct and other tax credits and deductions and the reduction of energy costs over time have moved the decision into the realm of economics, with the potential for substantial savings.
- EPAct (The Energy Policy Act of 2005) provides for a federal tax deduction of $0.60 per square foot for putting in energy-efficient lighting and associated controls. A certification entitles the building owner to a simple line item adjustment on their tax return. For example, a 200,000-square foot warehouse generates $120,000 in tax deductions when properly renovated.
- Utility Rebates vary but may be available from the building’s utility provider for installing energy-efficient lighting.
- Energy Savings – Simply put, a new lighting system can reduce power usage by 50 percent. With energy costs scheduled to double in some areas over the next five years, these savings could be important.
- 1245/1250 – After a renovation is completed, some of the assets may be considered personal property by the IRS that qualify for bonus depreciation.
- Abandonment – After a property renovation (new lighting system), the old systems are abandoned for accounting purposes, and the net book value of the asset is written off as a loss (i.e., taken as a tax deduction). This deduction can provide significant economic benefit to the property owner.
Let’s look at an example of a 250,000-square-foot warehouse. The cost of the relighting was $140,000, and the benefits were as follows:
- EPAct: $140,000
- Abandonment: $90,000
- Annual energy savings: $60,000
- Total tax deductions: $230,000
The net after-tax benefit of the tax deductions and the first year energy savings exceeded the cost of the retrofit. In other words, the ROI was under one year!
From the EPAct to abandonment and utility rebates, the economics of a lighting retrofit have never looked better and provide incentives that allow many businesses to afford new lighting systems that they otherwise could not have afforded. To achieve these benefits, there are some tax and compliance issues that you need to address. The EPAct tax deductions and the 1245/1250 analysis require a high level of tax and engineering expertise, which can help you to maximize your upgrades and retrofits so that you get the most bang for your buck.
Source: Area Development Online