Understandirg Hotel LED Lighting / Chiller Combination Tax Opportunities

Throughout the country hotels are upgrading to very energy efficient LED lighting. For the hotel industry, 2011 was the best year since 2008, giving hotel owners renewed confidence. Large hotels often have central chillers and can utilize the EPAct tax incentive opportunities to support the investment of LED and/or HVAC upgrades. Many hotels deferred maintenance and facilities upgrades during the economic downturn. The industry is now seeing a marked increase in energy efficient retrofits.

The EPAct Tax Opportunity

Pursuant to Energy Policy Act (EPAct) Section 179D, warehouse 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 doesn't 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 and the building envelope. The building envelope is every item on the building’s exterior perimeter that touches the outside world including roof, walls, insulation, doors, windows and foundation.

EPAct Category of Hotels

Hotels are one of the most favored EPAct tax deduction categories. Hotel lighting in guest rooms is exempt from the EPAct tax bi-level switching rule which is one advantage since guest rooms are the largest space category in hotels.

The EPAct tax ASHRAE rule set uses the inefficient individual room units, commonly called PTAC units, as the reference building for tax savings. A hotels with a centralized chiller system is very energy efficient compared to hotels that utilize PTAC units. This is why hotels with a central HVAC system are a favored EPAct category (chillers are quite common in large hotels).

LED Lighting and Hotels

LED lighting is characterized by low wattage that greatly reduces energy related operating costs, and long life which greatly reduces replacement related maintenance costs. LED lighting is particularly suitable for interior guest room packages (the largest category of spaces in a hotel), restaurants, and retail spaces.

Putting the LED Chiller Tax Combination Together

LED lighting is expensive so hotel owners with chillers should consider modeling the building in IRS approved software, seeking either a $1.20 or a $1.80 per square foot EPAct tax deduction.

Hotel LED/Chiller Tax Planning Example:

Presume a 300,000 square foot chiller hotel is interested in installing LED lighting at an installed project cost of $500,000. An EPAct knowledgeable tax adviser can pre determine whether the project will qualify for a $1.20 or a $1.80 per square foot tax deduction. At $1.20 per square foot, the EPAct tax deduction for the LED project will be $360,000. At $1.80 per square foot, the EPAct tax deduction will be for the full LED project cost of $500.000.

Hotel Energy Bench marking

Large hotels, 50,000 square feet or greater, are subject to mandatory building energy bench marking in major hotel markets such as New York, Washington D.C., all of California, Austin, and Seattle. Tax advisors for large hotels in these jurisdictions should discuss the bench marking results with facilities personnel and make sure they realize that EPAct tax incentives are available to support the energy reducing investments necessary to remedy low scores.

Kitchen and Laundry Space

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 them in the United States as of July 1, 2010.

Once the manufacturing of these products ceases, the cost of replacing these inefficient lamps will increase. Simply stated, hotels should consider acting now to replace these lighting fixtures to save on 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.

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 use vapor sealed lighting fixtures in these applications so that the auto exhaust fumes do not compromise the lighting fixture.

In Notice 2008-40, the IRS announced that parking garages are a property class specifically entitled to use the EPAct tax deductions. Also, parking garages are excluded from the tax bi-level switching requirement.

With EPAct scheduled to expire in 2013 and the ever increasing utilization of LED lighting, hotel owners should consider increasing their LED lighting budgets now.

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