Founder | BPI® Energy Auditor Certified Professional
In recent years, many have embraced the ‘Go Green’ initiative to realize the Zero Carbon Footprint agenda. Not only is it environmentally friendly, but in general the technology and lower costs have now made it well affordable, even profitable for you with a low payback on your money.
In support of this, the U.S. government has implemented measures to encourage citizens to use energy-saving lighting.
As a result, you can now qualify for tax deductions when you upgrade your home or business lighting to meet new energy efficiency standards.
And in fact, I used to do this day in and day out when I owned my previous commercial energy-efficient lighting distribution company.
Tax deductions and rebates could really add up. Sometimes 20-50% of the total project costs. This translated into a return on your investment of maybe two to three years, down to even four to six months sometimes. You can’t beat that!
This article explores the various tax deductions and credits you can apply for as a homeowner or a businessperson.
Let’s dive in!
What Energy-Saving Lighting Tax Deductions Can You Get?
Tax deductions and credits are available from the U.S. government when installing energy-saving lighting.
They include:
- The Energy-Efficient Commercial Buildings Tax Deduction
- Qualified Improvement Property Tax Bonus
- Energy-Efficient Home Improvement Credit
- Residential Clean Energy Tax Credit
There are several tax exemptions for home and business owners, but we shall focus on those related to energy-efficient lighting.
Join us as we explain in detail the requirements for each deduction and how you can make the most of them.
Energy-Saving Lighting Tax Deductions for Business Owners
As a business owner, you definitely would welcome an opportunity to reduce the amount of money you spend on taxes.
Luckily, you can cut down on your long-term energy costs and save some of the money you spend on taxes.
Installing energy-saving lighting in your small or large-scale business can make you eligible for tax deductions or tax credits.
The following are examples of tax deductions you can apply for:
Energy-Efficient Commercial Buildings Tax Deduction
The Commercial Buildings Tax Deduction (CBTD) – the 179D tax deduction – was implemented to encourage building owners to switch to energy-saving practices. This incentive was first established as part of the Energy Policy Act (EPACT) in 2005.
Over the years, the deduction has undergone adjustments owing to its expiry and reinstatement after varying periods. Thanks to the Consolidations Appropriation Act of 2021, the CBTD was made permanent.
Here are the eligibility requirements:
- Your newly constructed or renovated building can qualify for these deductions if it meets the required energy efficiency standards.
- Engineers, building owners, and designers installing the improvements can qualify for the CBTD. If the government owns the building, the professionals designing the improvements can apply for the deduction.
- You can apply for the incentive the same year you upgrade to energy-saving lighting to reflect the energy efficiency standards in place.
How Can I Benefit From the 179D Deduction?
For building owners and designers who reduce their energy usage by 50%, the tax deduction could reach up to $1.88 per square foot.
These improvements target the cooling, heating, ventilation, and indoor lighting systems.
You can also apply for partial deductions of up to $0.63 per square foot.
Requirements for the 179D Tax Deduction
To receive the incentive, you must meet some basic requirements. First, consider the type of building for which you intend to apply for the deduction.
Buildings that qualify include:
- Warehouses
- Commercial buildings
- Multifamily residential buildings
- Structures that have been converted from other uses to a primarily commercial one
- Libraries
- Public universities
- Parking garages
- Industrial buildings
179D for Fully-Qualifying Property
Your property can qualify for a full tax deduction if it saves 50% on energy due to the energy-saving improvements.
The savings could result from internal energy-saving lighting, heating, ventilation, and cooling upgrades.
179D for Partially Qualifying Property
Partial tax deductions presented by the 179D require:
- 10% power consumption reduction on building envelope
- 15% energy savings by heating, ventilation, and air conditioning (HVAC) and hot water (HW)
- 25% energy saved by installed energy-efficient lighting
The percentage in savings outlined by the qualifications refers to the decrease in costs of the total energy used in HVAC, HW, and indoor lighting.
This figure is compared to the minimum requirements a reference building meets according to the ASHRAE standard.
Hence, you can use specialized software for modeling systems to measure energy savings in your building.
179D for Exempt Organizations
Following some recent adjustments in the 179D, engineers and architects can receive the tax deduction after designing buildings for tax-exempt organizations.
Some of these entities include:
- Private educational institutions
- Non-profit organizations
- Political organizations
- Churches
- Native American tribal governments
- Charitable organizations
Qualified Improvement Property (QIP) Bonus
You can consider a QIP tax bonus if you improve the interior of your non-residential building.
Replacing the drywall, interior lighting, plumbing, ceilings, or doors can serve as indoor improvement required for this bonus.
To qualify for this tax bonus:
- The building must be already in service when the improvements are made.
- Also, the taxpayer must have made the improvement themselves.
- Finally, the upgrades must be made inside the building.
As the taxpayer responsible for the upgrades, you can deduct the total cost of the qualified investment immediately instead of spreading it over several years.
At the beginning of 2023, the bonus depreciation is supposed to phase out with 80% in 2023 and 20% in each subsequent year. This leveling off means that in 2024 it will be 60%, and in 2025 it will be 40%.
However, some interior adjustments are not honored in this bonus, including:
- Internal framework
- Escalators
- Elevators
- Structure enlargements
Energy-Saving Lighting Tax Deductions for Homeowners
As a residential property owner, you can also qualify for certain tax deductions. Let’s discuss them.
Energy Efficient Home Improvement Credit
Lighting is responsible for about 15% of a household’s energy usage.
The Energy Efficient Home Improvement Credit reimburses homeowners on their taxes if they increase their household’s energy savings by installing energy-efficient fixtures.
Previously, it was a $500 lifetime credit.
However, the IRA increased it to $1,200 for years after 2022. Hence, from the beginning of the 2023 tax year, a homeowner could request a 30% tax credit on eligible expenditures to increase their household’s energy-saving lighting capabilities.
Solar panels, exterior windows, skylights, and air sealing, to mention but a few, are examples of energy-saving lighting expenditures that qualify for the credit.
The maximum credit of $1,200 applies to parts used for building envelopes and audits on the home energy status and energy property.
An additional $2,000 covers qualified water heaters, pumps, and boilers, bringing the total possible credit to $3,200.
Residential Clean Energy Credit
This tax credit started as the Residential Energy Efficient Property Credit, which was set to expire after 2023. It allows homeowners to claim taxes worth 30% of the qualifying expenditures.
The Residential Clean Energy Credit is scheduled to begin phasing out in 2032 and expire in 2034. A property is eligible for the credit if its use is connected to the taxpayer’s residence.
The rates offered depend on the year the credit was requested. For example, if it was in service before January 1st, 2022, the rate is 26%. From this date till the phase-out in 2033, the rate is 30%.
Key Things to Remember
- Energy-saving lighting tax deductions will benefit you in terms of cost-savings. Energy-efficient lighting solutions are also sustainable and guarantee improved lighting quality.
- It’s important to understand the eligibility criteria for tax deductions. A rule of thumb is to go for Energy Star Certified lighting equipment for guaranteed eligibility.
- You should maintain accurate documentation as supporting evidence when claiming for tax deductions.
- Keep up-to-date with the necessary tax laws and regulations to ensure compliance
- Consult a tax professional for assistance in claiming these tax deductions
Energy-Saving Lighting FAQs
What is the difference between a tax credit and a tax deduction?
Before calculating your taxes, your taxable income has to be established. Tax deductions reduce your taxable income by a specified amount before your taxes are calculated.
On the other hand, tax credits are subtracted directly from the taxes you owe. Therefore, tax credits can also increase your tax refund.
Conclusion
It is most likely in your best interest to understand the benefits of energy-saving lighting tax deductions and credits if you own property and we hope we covered at least a good deal of that here.
As a business owner, you can apply for the Energy Efficient Commercial Buildings Tax Deduction and Qualified Improvement Property Tax Bonus. Both of them can help you get back some of the money you spent improving the energy efficiency of your building(s).
On the other hand, homeowners can bank on the Energy Efficient Home Improvement Credit and Residential Clean Energy Tax Credit to lighten the tax burden.
For more about how to shift to energy-saving lighting, check out our category all about lighting here.