The LED Lighting Tax Aspects of Restaurants

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Restaurants throughout the country are moving quickly to install energy efficient LED lighting. Despite the typical high upfront costs, LED lighting offers exciting lighting design capabilities, energy savings, maintenance savings, utility rebates and substantial EPAct tax savings that can make LED lighting the best overall choice. Before the widespread introduction of LEDs, it was often difficult to execute an energy efficient design that would enable an entire restaurant to qualify for an EPAct tax deduction.

The EPAct 179D Tax Opportunity

Pursuant to Internal Revenue Code (Code) Sec. 179D, as enacted by the Energy Policy Act (EPAct),1 building owners or tenants making qualifying energy-reducing investments can obtain immediate tax deductions of up to $1.80 per square foot.

If the building project does not qualify for the maximum $1.80-per-square-foot immediate tax deduction, there are tax deductions of up to 60 cents per square foot for each of the three major building subsystems: lighting, HVAC (heating, ventilating, and air conditioning) and the building envelope. The building envelope is every item on the building's exterior perimeter including the roof, walls, insulation, doors, windows and foundation.2

Lighting Tax Planning

Design

To make the customer comfortable with familiar surroundings, national restaurants often want the same look and feel at each property. Some restaurants have interior ceiling designs with surfaces and hanging or mounted objects that limit lighting layouts to fixed spaces. The LED advantage is that LED lighting is very powerful light that can be focused exactly where the lighting need is. In fact, LED lighting greatly expands the interior designer’s alternatives. Restaurants typically utilize numerous lighting fixtures and the maintenance costs for replacing previous generations of shorter life lighting projects could be quite expensive particularly with high ceilings and other lighting in hard to reach locations.

Space Combinations

Many popular restaurants have large open design configurations that sometimes combine spaces devoted to a bar/lounge, dining and the kitchen. Here the EPAct tax deduction opportunity is to use the lower wattage spaces to balance out higher wattage needs so that the overall lighting wattage is energy efficient and effectuate an EPAct qualifying design. Although good building design should always trump tax, by working together, the tax adviser and the designer can often accomplish their mutual goals.

Utilizing Daylighting Combinations

Many restaurants have large window to wall ratios in the customer serving areas. Some restaurants utilize skylights. Daylighting systems save lighting related electricity by dimming or turning off lighting when natural lighting is available through windows and skylights. Here the tax planning opportunity is to use daylighting systems including shading and sensors to optimize the use of the large 40% tax wattage power allowance for day lighting.3 For example, for tax purposes a 100 watt fixture will be considered to be a 60 watt fixture if it is within the day lighting sensor controlled area, meaning day light reaches the fixture. Note that to receive the 40% day lighting tax power allowance the building must be modeled in IRS approved building simulation software.

LED's and HVAC (use the V)

HVAC is by far the largest energy user in restaurants. When building new facilities and upgrading existing facilities restaurant owners should carefully consider installing the most energy efficient HVAC equipment and HVAC controls systems available in the market. One important tax technique is to optimize the use of energy efficient Ventilation, which is the V in HVAC. Good ventilation is critical in restaurants due to kitchen fumes and long periods when customers are stationary. Energy efficient ventilation optimizes the energy savings related to changing fresh outside air with the older previously circulated air. The use of Energy Recovery Ventilation (ERV) can capture the energy being ventilated and exchange it with the fresh air being pulled in from the outside. In addition, since most restaurants are less than 75,000 square feet, installing a Variable-Air-Volume (VAV) packaged unit will generally qualify for an EPAct tax deduction.

LEED Restaurant Tax Planning

Virtually all large expanding national restaurant chains have or are considering a LEED certification qualifying restaurant design. LEED stands for Leadership in Energy and Environmental Design and is the renowned standard for sustainable buildings in the United States.4 LEED restaurants may be required in some shopping centers and may receive expedited zoning and permitting approval while typically earning higher utility rebates. For large chains a LEED restaurant is a powerful tax planning tool since it already has building energy simulation model that can be converted into the EPAct tax model necessary for achieving the HVAC and building envelope EPAct tax deductions. It is particularly important for large chains with new energy efficient prototypes to perform an energy simulation model regardless of LEED goals. The model will make it clear whether the facility already qualifies for EPAct tax savings or is on the cusp of qualifying for EPAct tax savings.

McDonalds, Chipotle, and Starbucks are among the growing number of restaurant chains incorporating LEED standards into their building design. According to an Earth and Industry Article, Starbucks has even replaced all incandescent and halogen bulbs with LEDs in 8,000 stores and has made mandatory that all newly built Starbucks will obtain LEED certification.5 Independent restaurants are also taking advantage of LED lighting. For example, Red Stag, a Minnesota dining hall, achieved LEED certification through techniques including converting almost 100% of their lighting to LEDs. Since so much of a restaurant’s operating costs are directed towards energy use, much more so than the average small business, it is becoming a more common investment for a restaurant to achieve LEED certification points through energy reduction measures.

Putting the Prix Fixe Program Together

The most energy efficient LED lighting based restaurant chain that will qualify for the highest level of tax deduction will be the one that puts it all together like a good Prix Fixe meal. Putting it all together means installing LED lighting, day lighting, and high efficiency HVAC with an emphasis on V. The chain that puts these together will achieve large energy savings, large rebates and large EPAct tax deductions.

Citations:

1. Goulding, Charles, Goldman, Jacob, & DiMarino, Nicole. “EPAct Tax Deductions for Lighting Gain Wider Use.” Building Operating Management. July 2008. Pg 68-74.

2. Goulding, Charles, Goldman, Jacob, & Goulding, Taylor. “The Economic, Business and Tax Aspects of Light Emitting Diode Interior Building Lighting.” Building Operating Management. January 2009. Pg 31-32.

3. Goulding, Charles, Goldman, Jacob, & Goulding, Taylor. “The Tax Aspects of ‘Daylight Harvesting’” Corporate Business Taxation Monthly, August 2008, Pg. 35-38.

4. Goulding, Charles, Goldman, Jacob, & Aboff, Amelia. “How LEED 2009 Expands EPAct Tax Savings Opportunities” Corporate Business Taxation Monthly, September 2009, Pg. 11-13.

5. Hurst, Timothy. "All New Starbucks Stores to Be LEED-Certified." Earth and Industry. Earth and Industry, 12 Nov. 2009. Web. 15 Oct 2010.

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