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Putting Incentives to Work

One electrical contractor recently used a provision of the Energy Policy Act of 2003 to salvage a project that was in danger of being postponed – and earned an attractive tax incentive at the same time.

The contractor had proposed replacing 250 metal halide light fixtures in a 20-year-old city-owned building with new energy-efficient LED fixtures. The new fixtures would provide more light and use 50 percent less energy.

Even though a cash flow analysis demonstrated the $51,000 project cost would be offset by energy savings within the first year, the city engineer remained skeptical – and hesitant to commit to the initial cash outlay during a time of tight city budgets. Rather than see the project stall, the contractor came up with an innovative solution, taking advantage of a provision in IRS Code Section 179D.

Among other incentives, Section 179D offers a federal income tax deduction of up to 60 cents per square foot for installing qualified energy-efficient lighting. When such improvements are made to government-owned buildings, however, the deduction may be allocated to the taxpayer that is primarily responsible for designing the improvements.

In exchange for the city allocating its Section 179D deduction to the electrical contractor, the contractor agreed to offer the city a $5,000 discount. This provided the city engineer the added economic security he needed so the contractor was able to keep the project alive.

What’s more, since the contractor made sure the improvements achieved the required reduction in energy usage, he also earned a sizable Section 179D tax benefit – in this particular case, a $50,000 income tax deduction which, in the 35 percent tax bracket, was the equivalent of a $17,500 tax benefit. This savings was more than enough to offset both the cash discount and the relatively modest certification costs the contractor incurred to demonstrate compliance.

The result was a win all around: the city achieved long-term energy savings while the contractor kept his crews profitably employed – and enjoyed a significant tax deduction at the same time.