EPACT 179D - The Forgotten Tax Deductions

EPACT refers to the Energy Policy Act of 2005 and its subsequent amendments. There were several great policies included in EPACT 2005 to spur the development of renewable energy and to incentivize energy efficiency. One of the major incentives for energy efficiency were the tax deductions created for lighting, HVAC, and building envelope improvements. 

The EPACT 179D tax deductions are calculated based on the degree to which a facility has improved its efficiency beyond the ASHRAE 90.1.2001 standards. Improvements must be made to depreciable assets and the deduction amounts must be calculated in a formulaic manner to arrive at a $/sq.ft. value that can be deducted. Although there is some complexity involved for the calculation of the deduction value for HVAC and building envelope efficiency, the calculations for the deductions allowable for lighting are very simple. The lighting must improve upon the ASHRAE 90.1.2001 standard by 25% as measured by Lighting Power Density in W/sq.ft. Different types of spaces will have their own efficiency standards. For example, manufacturing space requires more light than warehouse space and these differences are taken into account when calculating the deduction amount which ranges from $0.30/sq.ft. to $0.60/sq/ft for 25% to 40+% improvements over the ASHRAE standard, respectively.

So if the EPACT 179D deduction is so simple, why are so few end users taking advantage of it? Its free money right? There are some good firms out there that specialize in these deductions like Energy Tax Savers, but EPACT 179D still isn't getting the love it deserves. I believe this is due to the unwieldy triangle that the current paradigm requires. ESCOs and lighting firms just want to sell lights, not engage in a discussion about tax strategy. As a result, few lighting firms really include EPACT 179D deductions in their sales pitch or service package. Most of the time, they just refer the customer to a firm like Energy Tax Savers after the lighting install is complete. Having a separate firm conduct a site visit and complete the documentation is inefficient and expensive. Operational personnel who buy the lights don't follow up to get the documentation for the deduction and the customer's accountants either don't want a consulting firm telling them how to do their jobs or can't be bothered with the effort to generate documentation for the EPACT 179D deduction since its often a modest sum. As a result, the tax deduction goes unused.

At Energy Tariff Experts, we believe that the only way to improve the utilization of the EPACT 179D deductions is for lighting firms to incorporate it into their service package. The IRS Regulations require that the documentation for the deduction be prepared by a "qualified individual" which generally means a licensed PE. Unless this "qualified individual" is brought in by the lighting firm to prepare the EPACT 179D documentation, this deduction will continue to be an orphan. This may be a moot point as the EPACT 179D deductions sunset at the end of 2013 and Congress has yet to seriously look at extending them or replacing them with something better.