Congress has extended the Energy Efficient Commercial Buildings Deduction (Section 179D) tax credit originally included in the 2005 Energy Policy Act (EPACT) and the Emergency Economic Stabilization Act of 2008. If you manage, own or lease a commercial or industrial building, and you pay taxes, you may be entitled to receive a tax credit per square foot of building for installing or upgrading your lighting to an energy efficient LED system. You are eligible to claim the deduction for new construction and energy-renovation projects.
Obvious benefits of an LED lighting retrofit or LED lighting upgrade project include:
● Reduce energy consumption
● Reduce your energy bills
● Reduce maintenance costs
● Improve office efficiency
Qualified Improvement Property (QIP) – 100% Bonus Depreciation & Section 179
LED lighting installed on nonresidential buildings may qualify for an immediate write-off using 100% bonus depreciation or Section 179, provided the lighting is installed after the building is in service. This allows companies to deduct the full cost of eligible investments immediately, rather than spreading the deduction over a number of years.
Bonus depreciation is set to phase-out beginning in calendar year 2023. The maximum immediate deductions will be:
● 80% for property placed in service in 2023
● 60% for property placed in service in 2024
● 40% for property placed in service in 2025
● 20% for property placed in service in 2026
Section 179 allows taxpayers to immediately expense up to $1,050,000 in asset additions, including qualifying improvement property. The deduction phases out dollar for dollar once a taxpayers total qualifying purchases exceeds $2,620,000.
179D: Energy Efficient Commercial Buildings Deduction
Sec. 179D is a popular tax incentive, which was recently made permanent as part of the 2021 Consolidated Appropriations Act. Projects such as upgraded interior or exterior lighting systems may qualify to claim this tax deduction of up to $0.60 per square foot. To qualify, you must reduce the energy and power costs of a building by 25%. The building owner qualifies for the deductions, unless the building is owned by the federal, state, or local government. In that case, the company responsible for the system’s design may take the deduction.
Qualified Buildings Include:
● Commercial Buildings
● Warehouses
● Parking Garages
● Multifamily properties (with four stories or more)
● Government-Owned Buildings
● Public Universities
● Libraries
To qualify for the full deduction of $1.80-1.88 per square foot, energy and power expenses must be cut by 50%, benchmarked against the ASHRAE Standard 90.1-2007 (or 90.1-2001 for pre-2018 buildings or systems). Project costs are gauged against ASHRAE standards from two years before construction initiation. Partial deductions are also attainable based on project specifics and energy savings. Energy reductions of 10% can still amount to large savings. In the case of lighting upgrades only, you must reduce the energy and power costs of a building by 25%.