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Tax opportunities for LED lighting

Businesses are sitting on significant amounts of cash these days and everyone is seeking opportunities to put some of this cash to work. Companies might consider taking advantage of the new bonus depreciation rules and “The Energy Policy Act”. The installation of high energy efficient lighting systems, combined with these tax programs, could provide commercial property owners a very reasonable return on their investment. Here are a couple of thoughts:

Indoor lighting systems:
The Energy Policy Act provides an immediate tax deduction for the cost of improvements to commercial property designed to save energy through heating, cooling, water heating and interior light systems. These deductions are available for systems placed in service through December 31, 2013.

One particular aspect of this system may make a good investment for businesses; updating interior lighting to an energy efficient system. This upgrade would typically be depreciated over a 27 or 39 year life. However, under the Energy Policy Act, much of the system update can be depreciated using accelerated methods in the current year. The installation of light emitting diode (LED) lighting would typically qualify for the deduction under this program. The Energy Policy Act allows for a deduction of up to $0.60 per square foot for qualifying improvements. To qualify the project must be certified by a licensed professional to reduce lighting power density by 25 – 40 percent (50 percent if a warehouse) compared to industry benchmarks. The rules are a bit cumbersome, so I recommend reviewing this guide for complete details and talking to both a CPA and a qualified engineer.

Outdoor lighting systems:
The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 provides businesses with 100 percent bonus depreciation for certain capital investments placed in service between September 8, 2010 and December 31, 2011.

Outdoor lighting systems, which typically involve illuminating parking lots, are another area in which businesses might be able to find a good return on their investment. For the first time, installing outdoor energy efficient LED lighting qualifies for a 100% deduction under the new bonus depreciation rules.

In addition to the immediate tax deductions noted above, installing LED lighting will have other financial benefits.

a.) Reduced energy consumption: LED lighting is up to two times more efficient than compact florescent lighting and four times more efficient than incandescent lighting. Thus, installing LED lighting should help you cut your utility expense significantly.

b.) Long term maintenance: LED lights can last for up to 25 – 30 years under normal use before replacement is required. Compare this to incandescent bulbs which last for approximately 1,000 hours and compact fluorescents which last about 8,000 hours. Replacing light bulbs using lifts or buckets with expensive labor will almost be eliminated. This can greatly decrease maintenance costs on commercial properties.

The Energy Cost Savings Council estimates that energy-efficient lighting projects generate an average 45% return on investment, and repay themselves in just 2.2 years. However, upwards of 80% of commercial buildings still operate on lighting systems installed before 1986. That kind of return certainly beats short term interest rate.

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