Optimizing LED EPAct 179D Tax Deductions

Businesses are rapidly installing Low wattage Light Emitting Diode (L.E.D.) lighting in building facilities throughout the country. A business can claim Section 179D lighting tax deductions for qualifying low wattage installations completed as of January 31st 2013. Therefore, the Section 179D EPAct(Energy Policy Act of 2005) tax incentive for low wattage lighting only has three years left which results in the 3,2,1 count down for those property owners who want to utilize the tax incentive. Businesses owning or leasing buildings and particularly multi property owners should be planning their 3 2 1 L.E.D. lighting installation count down.

LED Lighting Countdown Schedule

Count down Remaining EPAct Years

3 2011

2 2012

1 2013

The lighting industry is quickly moving to LED lighting for almost all mainstream building lighting applications. All of the major lighting manufacturers and numerous start ups are rushing in to meet the burgeoning market demand. Like any new major product innovation, there are positive and negative aspects to this massive level of technology change. Some of the positive aspects of LED lighting are very low wattage, the resulting ongoing energy costs, long lamp life, hence reduced replacement and maintenance costs, and zero mercury content. The Department of Energy estimates that widespread introduction of LED's could save 260 billion in U.S. energy costs, remove the need to build 40 new power plants and cut lighting demand for lighting electricity by more than 30 percent. Heretofore, some of the major LED negatives have been high initial product cost and consistent performance. On the cost side the good news is that price points are declining, the energy savings, replacement costs and maintenance costs previously described are material and EPAct tax savings and utility rebates reduce the upfront costs. LED product performance issues are being addressed by the industry and warranties can be utilized to mitigate performance risk concerns.

The Section 179D Tax Provisions

Pursuant to Section 179D and its underlying ASHRAE (American Society of Heating Refrigeration and Air Conditioning) building energy code, commercial buildings are eligible for energy efficiency tax deductions of up to $1.80 per square foot. If a building’s energy reducing investment doesn't qualify for the full $1.80 per square foot deduction, deductions are available for any of the three major sub-systems, including:

1. Lighting

2. HVAC (Heating, Ventilation and Air Conditioning) and

3. The building envelope

Each component can qualify for up to 60 cents per square foot EPAct tax deductions. The building envelope is anything on the perimeter of the building that touches the outside world including roof, walls, windows, doors the foundation and related insulation layers.

Rapid Product Introduction

For building interiors, the first major building category to move to LED's was parking garages.1 Electricity costs for lighting is essentially the exclusive energy cost for garages which often have high electricity costs due to 24 hour operation often required for security purposes. Now we are seeing the LED market quickly expand to retail, hotels and restaurants, where a better higher price point, lighting source is more easily economically justified. 2,3 The lighting industry is now poised for broad based expansion into the office building, industrial and warehouse markets making the 3,2,1 EPAct tax deduction countdown crucial.

As indicated in a recent L.E.D. magazine article, “Dramatic improvements in commercially available LED performance in recent years, as well as significant cost reduction, has made it feasible to design LED lamps to offer comparable lumen output and to compete with other established lighting technologies on the basis of cost of ownership.4” The L.E.D. Industry has some major nationwide initiatives to accelerate L.E.D. installations. The LED University™ is working with universities to save energy, reduce maintenance costs and expand L.E.D.’s “across the full range of campus infrastructure.”5 Similarly, the Cree LED City program is “ …reducing energy use for lighting by 50-80% and realizing maintenance savings that can reach six figures…”6

Utility Rebate Planning

More and more utilities are recognizing the benefits of LED technology. For example the two major Connecticut utilities, namely United Illuminating and Connecticut Power are currently offering up to a 50% rebate for LED lighting installations.

Most utilities with rebate programs have prescriptive rebates and some may offer custom rebates. Prescriptive rebates provide a prescribed rebate for a particular type of lamp or lighting fixture technology.

Prescriptive rebates are quite common with mature technologies like fluorescent lighting where the utility knows with a high degree of certainty, what the resulting wattage and product performance is going to be. With new technologies, including such technologies as LED lighting, utilities sometimes provide so called custom rebates that are customized to the expected performance of the specific project. Customized rebates for electricity reducing products are frequently called kW rebates because they are based on the actual amount of electricity reduction which is called kW reduction. If a utility offers both prescriptive and kW rebates a calculation should be performed to determine which utility rebate alternative produces the best result.

federal lighting bans

T-12's are one of the most widely utilized lamps and can be found in many existing buildings, merchandise display cases, and numerous other applications. Pursuant to the Energy Policy Act of 2005, ballast manufacturers cannot manufacture T-12 magnetic ballasts after July 1, 2010. T-12 lamps are very high energy users compared to today's lighting products. The number in a fluorescent lamp description describes the number of eights of inches in the lamps diameter. Hence a T-12 lamp is an inch and one half and T-8 is an inch in diameter. Companies with large purchases of T-12 replacement lamps should begin to expect price increase for future replacements. It wasn't until 2005 that the number of T-8's sold exceeded T-12's which demonstrates that there are still a tremendous number of existing T-12 lamps destined for replacement.

The second main stay commercial lighting product that was made illegal to manufacture as of January 1, 2009 is a standard probe start metal halide fixture. Pursuant to the Energy Independence and Security Act of 2007 a metal halide lamp fixture with lamps greater than or equal to 150 watts but less than 500 watts contain must either be:

1. a pulse start metal halide ballast with a minimum ballast efficiency of 88 percent,

2. a magnetic-start ballast with a minimum ballast efficiency of 94 percent,

3. a non-pulse state electronic ballast with

A. a minimum ballast efficiency of 92 percent for wattages greater than 250 watts

B. a minimum ballast efficiency of 90 percent for wattages of 250 watts or less.

There are some exceptions to these rules for some specialized fixtures.

L.E.D Magazine describes the impact of the Federal Bans in this way, “Legislation banning inefficient lamps, coupled with customer awareness of the cost of ownership analysis, will create a strong demand for replacement LED lamps. Market conditions are right for the LED replacement lamp market to accelerate in the next few years, according to a new report from Strategies Unlimited. Although the market for LED replacement lamps is still in its early stages of development, lamp revenues are forecast to grow at a CAGR(Compound Annual Growth Rate) of 107% through 2013.7”

New Building Energy Efficiency Benchmarking Rules

Many of the country’s major cities, including NYC, LA, and D.C., have recently enacted public disclosure benchmarking rules, typically requiring buildings 50,000 square feet or greater to report their building energy use over the internet based on scheduled dates. This disclosure is intended to inform tenants and make it obvious which properties have been managed to accomplish energy efficiency and which have not. The recommended tax planning strategy is to use EPAct tax incentives to retrofit to higher efficiency levels before the mandatory disclosure date. Presumably it will be detrimental to tenant selection and resulting property values to report an energy inferior building. 7 Acting on the 3, 2, 1 L.E.D. countdown will enable property owners to report much more efficient buildings.


There are multiple compelling reasons to convert to low wattage LED interior lighting. A massive market conversion has begun. Tax professionals need to realize that most low wattage LED lighting is typically eligible for large Section 179D EPAct tax deductions and need to work closely with building operators during the next three years to match the 3 year EPAct tax deduction countdown period with the product driven market changes.


1.Goulding, Charles, Goulding, Taylor & Kumar, Raymond. “LED Parking Garage Lighting Installations Accelerate with EPAct Tax Savings.” Corporate Business Taxation Monthly. September 2009. Pg 15-16, 46.

2.Goulding, Charles, Goldman, Jacob, & Goulding, Taylor. “Hotels and Motels Most Favored Energy Policy Act Tax Properties.” Corporate Business Taxation Monthly. March 2009. Pg 17-18.

3.Goulding, Charles, Wood, Kenneth, & Aboff,Amelia. “The Energy Tax Aspects of Restaurants.” Corporate Business Taxation Monthly. February 2010. Pg 11-12, 35-36.

4.LED replacement lamp market to see high growth rates, says Strategies Unlimited. LEDs Magazine. 18 June 2009. Web. 26 April 2010.

5.Cree Inc. http://www.leduniversity.org/about/index.asp. 2008.

6.Cree Inc. http://www.ledcity.org/. 2009.

7.Millán, Naomi. “NYC To FMs: Show Us Your Energy Use.” Building Operating Management. March 2010. Pg 23-29.

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