How Qualified Improvement Property applies to LED Lighting Upgrades in 2023

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Qualified Improvement Property (known as QIP) is a valuable tax advantage that C&I businesses can leverage to help reduce the upfront cost of a LED lighting retrofit (among other types of projects). However, the value of this tax advantage, known as bonus depreciation, will begin to gradually diminish over the next few years as temporary rule changes established in 2018 begin to phase out.

Read this short write-up to learn:

  • The general requirements of QIP, and;
  • The schedule of bonus depreciation rate adjustments for the upcoming years

What is Qualified Improvement Property?

Qualified improvement property (QIP) is a term used by the IRS to categorize improvements made to the interior of a commercial property (business or income-producing building). Property improvements that qualify under QIP are eligible for bonus depreciation, which allows taxpayers to recognize up to 100% of the project’s depreciation expense in the first year of acquiring the asset — reducing the business’s annual taxable income. Thus, saving money on taxes.

To qualify, improvements must be:

  1. Made to a building that is already “in service” and;
  2. Are expected to last longer than one year.

Projects eligible for bonus depreciation include the installation or replacement of drywall, interior doors, lighting, flooring, ceilings, fire protection, and plumbing.

This means that commercial and industrial LED lighting retrofits are generally considered qualified improvement properties, and are therefore eligible for bonus depreciation.

Bonus depreciation rate decreases beginning 2023

From 2018-2022, QIP’s placed in service were eligible for 100% bonus depreciation, allowing the taxpayer to deduct the full cost of the acquired asset up front.

However, starting in 2023, the temporary rule that allowed for 100% bonus depreciation began it’s phase out process — and the allowed rate falls by 20% each year for projects placed in service 2023-2026.

Here is the upcoming depreciation schedule, according to Bloomberg tax:

  • QIP placed in service in 2023: 80% bonus depreciation
  • QIP placed in service in 2024: 60% bonus depreciation
  • QIP placed in service in 2025: 40% bonus depreciation
  • QIP placed in service in 2026: 20% bonus depreciation

Businesses that are looking to capitalize on the Qualified Improvement Property rule can potentially maximize their tax break by completing projects during this upcoming year — receiving the 80% bonus depreciation before it declines to 60% the following year.

Defining “Placed in Service” for Qualified Improvement Property

The IRS depreciation fact sheet states that property is generally considered to be ‘placed in service’ when it is “ready and available for a specific use, regardless of whether or not it is actually used at the time.” This means that the date the QIP project being undertaken is completed will be the date recognized for the bonus depreciation rate (i.g. if you are implementing an LED retrofit, the project would need to be completed in 2023 to receive the 80% bonus depreciation).

Disclaimer: this article is intended to provide general information and should not be taken as financial advise. Businesses interested in QIP should consult with their accounting teams to learn how the policy applies to them.

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Sources

https://www.irs.gov/newsroom/new-rules-and-limitations-for-depreciation-and-expensing-under-the-tax-cuts-and-jobs-act

https://pro.bloombergtax.com/brief/qualified-improvement-property/#:~:text=Qualified%20improvement%20property%20is%20an,was%20first%20placed%20in%20service.

https://www.irs.gov/pub/irs-news/fs-06-27.pdf

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