New Tax Benefits Available For High-Efficiency Lighting

Significant new tax benefits are available to those who upgrade their existing lighting systems or specify high-efficiency lighting for new commercial buildings. The tax benefits are authorized by the Energy Policy Act of 2005. A new brochure, available free from the Silver Spring, MD-based National Lighting Bureau (NLB), provides an overview of the benefits and identifies sources of additional information.

According to the NLB, owners can earn an accelerated depreciation benefit equal to the cost of the lighting system or lighting system improvement, or $0.60 per square foot, whichever is less. Lighting systems that do not meet the efficiency required to earn the maximum deduction may be eligible for a smaller deduction. The benefit applies to discrete systems within a building (i.e. not all lighting in a building must meet the efficiency criteria for some of the lighting to be eligible for favorable tax treatment).

Insofar as commercial buildings are concerned, the Energy Policy Act of 2005 applies to the heating, ventilating, air-conditioning, water-heating system, and building envelope in addition to lighting. Rules for lighting are expected to take effect almost immediately, however, while other rules will take more time to develop.

The Energy Policy Act of 2005 applies to property that is placed into service no earlier than Jan. 1, 2006, and no later than Dec. 31, 2007. According to NLB Communications Director John Bachner, “Extensions of the law are likely, especially given the significant benefits the law is expected to achieve, and its low net cost.”

According to the new NLB brochure, experts predict that “the new law will generate energy savings equivalent to the output of more than 60 conventional, coal-fired power plants.” The tax deduction involved is merely accelerated depreciation, however. As such, “were the owner to sell the building, the federal government would be able to recapture whatever depreciation was not earned” at the time of the sale.

The National Lighting Bureau urges caution in developing systems to comply with the law. It says, “While improved energy efficiency is something we all want, high-efficiency lighting has to be High-Benefit Lighting in order to be genuinely cost- and energy-effective.” The brochure explains that High-Benefit Lighting is “lighting that creates an illuminated environment designed specifically for the workers and tasks involved, so they can perform their visual tasks faster, with fewer errors. Lighting that creates visual comfort free of glare. Lighting that enhances the appearance of a space and everything - and everyone - in it. Lighting that uses the high-tech equipment and controls available to deliver the absolute maximum ‘bang for the buck,’ which is exactly what High-Benefit Lighting is all about.”

The brochure also cautions, “Many people believe that the less energy their lighting system uses, the better. But that may not be the case.” It goes on to explain that seeming paradox by citing a hypothetical example that is “based on actual case histories collected by the National Lighting Bureau over the past 30 years.”

The example presents the case of the “Jones Doe Organization (JDO) that employs 100 people whom it pays an average $35,000 per year, including wages/salaries and benefits. The company decides to take advantage of the new federal tax incentives, along with local utility incentives, and invest in new lighting in order to save energy and save money. Right now, the company is paying $15,000 a year to keep its electric lighting on 10 hours a day, 6 days a week. It’s projected that the new lighting will reduce the energy cost by 50 percent, to $7,500 a year, and - based on that - Jones Doe’s CEO decides to make the change. The new lighting achieves the predicted savings, but in many areas the illumination is not quite as good as it used to be and, in others, the illumination is worse. As a consequence of the decline in lighting quality, it takes Jones Doe employees slightly longer to perform their visual tasks. Overall, the productivity of Jones Doe’s 100 employees falls an average of 1.5 percent. Seeing that that amounts to only 7.2 minutes a day - less than 1 minute an hour - the total loss seems to be a small price to pay for all that energy efficiency. But, it’s not.

“Jones Doe’s payroll amounts to (100 people x $35,000/year equals) $3,500,000 annually. A productivity loss of 1.5 percent costs the company $52,500 per year. As such, every dollar of energy saved winds up costing the company $7 in lost productivity. And to make matters worse, the total amount of energy saved may be far less than thought, because lower productivity (along with more visual errors) can result in people having to work longer hours to make up the difference. That can result in a building having to be kept operational longer and employees having to rely more on their personal vehicles and less on car pools and public transportation.

“Now imagine the exact same scenario, but with one small change,” the brochure continues. “Before retrofitting its lighting, Jones Doe retains a qualified lighting system designer. The designer’s principal concern is not energy savings, but the quality of light people need to perform their work faster and better. The designer incorporates the latest technology into the plan and, as a result, designs new lighting that will cut energy consumption by 50 percent and increase productivity by 1.5 percent. As a result, instead of losing $45,000 a year, Jones Doe saves $60,000 a year, and helps reduce the energy waste caused by low productivity.”

The National Lighting Bureau’s new Energy Policy Act of 2005 brochure is available for free viewing or download at its website (www.nlb.org). A PDF or hardcopy version (specify which) is available through request at ([email protected]) or (301) 587-9572. Links to lighting system designers and other organizations that can help are also provided at the NLB website.

This information was reprinted with permission from the the National Lighting Bureau, a not-for-profit, independent lighting information source sponsored by professional societies, trade associations, manufacturers, and agencies of the U.S. government. For more information, refer to the NLB website (www.nlb.org) or contact NLB staff by telephone (301) 587-9572 or e-mail ([email protected]).