Wanting to help finance public works during the Great Depression, the U.S. Treasury came up with the “depreciation” system, which required tax payers to prove that they were selecting the appropriate “useful lives” for their depreciable assets. Then in 1971, the class life asset depreciation range system (ADR) was introduced, and created “class lives” based upon broad classes of assets and a range from which a life could be selected for depreciation—mainly for machinery and equipment (but later expanded to include both building and land improvements).
30+ Years and Counting
A major tax code change came in 1986, when the Modified Accelerated Cost Recovery System (MACRS) was put in place. Under MACRS, the cost is recovered over a number of years based on the asset’s class. One of the major benefits of MACRS was to allow companies to take more depreciation in the beginning of an asset’s life to increase the net present value of capital purchases and help stimulate spending.
A lot has changed over the last 32 years. Technological innovation, the introduction of more energy-efficient and environmentally-friendly products, and the simple fact that things don’t last like they used to have all made lengthy depreciation schedules all but obsolete for some assets. Light fixtures fall into this category, and now NAED and its constituents are working to bring the tax code into the 21st century.
Here’s why: Under current IRS definitions, light fixtures are considered a structural component of a building (§ 1250 property), leaving it with a 39-year depreciation schedule. This means that light fixtures cannot be expensed either through Section 179 expensing or bonus depreciation.
For 2018, Section 179—which applies to new and used equipment—allows companies to deduct $1 million for items that are financed/purchased and put into service between January 1, 2018 and December 31, 2018. Bonus Depreciation is generally taken after the Section 179 spending cap is reached, and also applies to both new and used equipment.
The problem is that light fixtures rarely last 39 years before they need to be replaced. Plus, older fixtures are extremely inefficient and less “green” compared to newer systems. However, if lighting fixtures were looked upon as § 1245 property, it would lower the depreciation schedule and allow such purchases to be expensed through either Section 179 or bonus depreciation.
In late-2016, the IRS published a cost segregation guide to help building owners determine which parts of the electrical distribution system are considered §§ 1245 or 1250 property. Using the functional allocation approach (i.e., how a building’s electrical distribution system [EDS] is allocated proportionally by electrical demand load to the various items served by the system), the IRS defines what parts of the electrical system are part of the EDS.
Under this approach, the IRS defines lighting as end-use equipment or “consumptive devices,” which are not part of the building’s electrical distribution system. This category includes the actual equipment, machinery, or appliances to which the overall electrical system provides power, including process equipment (e.g., manufacturing machinery), building equipment (e.g., lighting, HVAC, and outlets for general accessibility), or other personal property (computers, printers, ovens, lamps etc.).
Changing Things Up
Should the tax code be changed to define the structural components such as the EDS, which is well-defined by the IRS’ cost segregation guide—instead of the generic term “electric wiring and lighting fixtures”—then light fixtures would be considered § 1245 property and allowed to be expensed via Section 179 or bonus depreciation.
Another way to tweak the code and bring it up to date involves The Tax Cuts and Jobs Act, which included several “real property exemptions” to Section 179 expensing, including: roofs, heating, ventilation, and air-conditioning property, fire protection and alarm systems, and security systems.
“As part of the technical corrections bill, we can ask that an additional real property exclusion for light fixtures be included,” says Palmer Schoening, chairman of the Family Business Coalition and president of Schoening Strategies, LLC, a government affairs and economic consulting firm that advises associations and family businesses on tax policy. “Other listed groups (i.e., plumbing, windows, and doors) might also be trying this approach.”
A Voice on Capitol Hill
Schoening, who is advocating for the code changes on NAED’s behalf (as well as other industry groups), says the goal is for taxpayers to be able to immediately expense light fixtures when they buy them—and not over a 39-year span. Because light fixtures are looked upon as being part of the building, and not a separate component, minimizing that span means “shortening up the depreciation schedule” to reflect a more realistic picture of how fixtures are purchased, installed, and replaced.
“We’re kind of locking arms with other industry partners like NEMA, NECA, and IEC and going up to Capitol Hill to try to get this done,” Schoening says. Along with the technical corrections bill, which could have a good chance of being heard and approved based on the fact that a major tax overhaul just took place, he says NAED is also seeking IRS and Treasury guidance on the issue.
Asked about the odds of getting the tax code changed, Schoening says, “I think we have a fair shot or else we wouldn’t be working on it.” However, he adds that the current political environment—which requires 60 votes to pass most bills—can be difficult to navigate. “Part of the problem is that no one has really headed up this issue, latched onto it, built the coalition, and set up the meetings,” says Schoening. “That’s what we’re doing now, but our biggest enemies are the fact that it’s a mid-term election year and that it takes 60 votes to get anything passed.”
Schoening tells NAED members, suppliers, and customers—all of which will benefit from the tax code change—to keep an eye on the issue and the potential introduction of legislation that will need co-sponsors and support.
“We plan to go into some key offices and develop a constituent-based approach where we’ll talk about the individual NAED numbers that are affected by the [antiquated] tax law,” says Schoening, who may also reach out to come members in key states and districts for help.
“This is an extremely technical change that we’re seeking, and there are only a few key offices that are helping us out,” Schoening says. “So, within those offices, we’re definitely going to be stressing the impact on NAED’s membership.”
Ed Orlet, NAED’s senior VP of membership and marketing, tells NAED members to stay on deck and ready to act as this issue develops. “The IRS—like every other federal agency—has people coming at it from every direction, wanting changes to current rules and laws,” Orlet explains. “It helps when you have policymakers—who, in turn, are contacted and supported by their constituents—who understand the changes and why they need to happen.”
Orlet says NAED is working with members of the House Ways and Means Committee and the Senate Finance Committee, and is asking both to support the IRS appeal. “This is a fairly typical approach to get members of congress to sign onto a letter saying, ‘This is a good idea that’s consistent with the law and with congressional intent,'” says Orlet, who welcomes the opportunity to work with NAED members who want to get “active” on this issue.
Getting members involved is particularly important, says Orlet, due to the technical nature of the issue. “With lighting technology evolving the way it is, the efficiency gains are coming much more frequently. As such, there is a case to be made for building owners to do these lighting upgrades more often,” says Orlet. “It just makes sense for us to help make the expensing rules consistent and as favorable for lighting as they are for other building components.”
From the business perspective, any tax code change that actually encourages building owners to take the step of investing in a project would help buoy the electrical industry as a whole. “We’re hopeful that this tax reform is going to incentivize a lot more economic activity through the changes in how things are expensed and depreciated,” says Orlet. “We would like more of that economic activity to benefit our members; it’s that simple.”Tagged with government, regulations, taxes
Discussion (1 comments)
I always thought of lighting equipment and controls as a system not part of the electrical distribution system. Unfortunately the bidding process rarely separates these two systems within the electrical contractor’s bid.