EPAct 179D Tax Savings for Hotels and Motels

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As a result of the severe economic downturn, many hotel and motel operators are taking advantage of the low occupancy period to install energy efficient equipment and reduce operating costs. On October 3rd, 2008 President Bush signed the Energy and Economic Stabilization Act of 2008 bill which extended the IRC Section 179D commercial building energy efficiency tax provisions for 5 years through December 31st, 2013. EPAct tax deductions are a function of square footage, and hotels and motels are often large properties. EPAct tax deductions are available for qualifying energy reducing lighting, HVAC (heating, ventilation and air-conditioning) and building envelope investments.

Lighting Tax Incentive Favors Hotels and Motels

The underlying rule set to qualify for the Section 179D lighting tax deduction makes hotels and motels the most favored property category for the tax incentive. The rule set requires at least a 25% watts-per-square foot reduction as compared to the 2001 ASHRAE (American Society of Heating Refrigeration and Air Conditioning Engineers) building energy code standard. Full tax deduction is achieved with a 40% watts-per-square foot reduction compared to the ASHRAE 2001 standard. The ASHRAE 2004 hotel/motel building code standard requires 41% wattage reduction, which means that any hotel or motel lighting installation that meets that building code requirement will qualify for the maximum tax deduction.

Hotel and Motel Occupancy Rooms

For most other building categories, the Section 179D tax provisions require compliance with the bi-level switching requirement. The comparison is always based on wired rather than plug-in lighting. Hotels and motels have a major advantage in that they often use plug-in lighting, and hotels and motels are specifically excluded from the tax bi-level switching requirement. Since occupant rooms are usually the biggest spaces in hotels and motels, this means that hotels and motels are typically able to use energy efficient lighting to generate large tax deductions for the majority of the facility.

Back of the House Spaces

Hotels often have large kitchen and laundry (so called back of the house) spaces that have historically used T-12 fluorescent lighting. This lighting is so energy inefficient compared to today's lighting products that it will be illegal to manufacture in the United States after July 1, 2010. Once manufacturing of these products ceases, the cost of replacing these inefficient bulbs will increase. Simply stated, hotels should consider acting now to replace these lighting fixtures to save both energy and lamp replacement costs. The EPAct lighting tax incentive can be used to address the opportunities related to these legally mandated product changes

Ball Rooms, Banquet Rooms and Restaurants

In these areas, hotels and motels have historically used designer type lighting that is energy inefficient and often very expensive to maintain and replace. In particular, replacing bulbs and lamps in high ceilings is very costly since expensive mobile hydraulic platform equipment must be rented or purchased to handle the replacements. New lighting products and, in particular, light emitting diode (LED) products, use a fraction of the energy and have a much longer useful life and are now being substituted. The combination of large energy cost reduction, operating cost reductions, utility rebates and EPAct tax deductions can greatly improve the economic payback from these more costly lighting upgrades.

Parking Garages

Many hotels have large adjoining parking garages that can save substantial energy costs and generate large tax deductions by upgrading to energy efficient fixtures. It is generally advisable to uses vapor sealed lighting fixtures in these applications so that the auto exhaust fumes do not compromise the lighting fixture. In Notice 2008-40 issued March 7th, 2008, the IRS announced that parking garages are a property class that is specifically entitled to use the EPAct tax deductions. Also, parking garages are excluded from the tax bi-level switching requirement. Please see the September, 2008 International Parking Institute article devoted to parking garages lighting deduction tax opportunities .

LEED Hotels

Many top hotels are seeking to become LEED (Leadership Energy Environmental Design) certified (See LEED Building Tax Opportunities Article ). Hotels find that certain categories of frequent travelers are very interested in staying in facilities that have clearly demonstrated they are focused on the environment and sustainable design. To become LEED certified, a hotel must have a building energy simulation model created by a qualified engineer. Modeling is also required for the EPAct, HVAC and Building Envelope tax deductions. Qualified tax experts that know how to make the adjustments to convert LEED computer models to EPAct tax deduction models can evaluate LEED models and determine whether large tax deductions are probable. For example, a 500,000 square foot LEED hotel that qualifies for the maximum EPAct tax deduction will receive an immediate tax deduction of $900,000 =(500,000*$1.80). Hotel owners who understand the magnitude of these benefits can use the tax savings to help justify the costs related to achieving LEED status.

Conclusion

Hotels and Motels are the most favored building category under the EPAct commercial building tax deduction legislation. Owners who understand these opportunities can act during the current economic downturn to improve their facilities, reduce operating costs and potentially become LEED certified facilities.

References

Goulding, Charles R., Peter Kelly, and Taylor Goulding. "EPAct Tax Deductions for Parking Garage Lighting Projects Gain Wider Use." Parking Professional - International Parking Institute (2008).

Goulding, Charles R., Jacob Goldman, and Nicole DiMarino. "Leed Building Tax Opportunities." Corporate Business Taxation Monthly (2008).

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