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Private Equity Secret: LED Lighting Improves Profitability

Explore and evaluate the potential savings your business could benefit from LED lighting


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Private equity firms typically acquire portfolio companies with a strategy to grow them organically and with acquisitions, while finding synergies in the cost structure to reduce expenses and improve profitability. The goal is to increase EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) which raises enterprise value (the price another is willing to pay for the business). 

Besides the typical shared activities of reducing people, improving systems and processes, implementing lean methodology and eliminating redundant costs, private equity firms are investing in LED lighting.

WHY?

  • LED lighting provides an immediate reduction of electricity costs as LED consumes at least 75 percent less energy and lasts 25 times longer that incandescent lighting according to the U.S. Department of Energy.
  • Reduction in facility maintenance costs as bulbs and lamps have a longer operational life and have a 10-year warranty.
  • Utility companies often offer significant financial incentives for businesses to reduce power consumption by switching to LED lighting
  • LED lighting and controls provide a comfortable and productive visual environment while monitoring energy consumption by controlling lighting.  Switching LED lighting on/off frequently does not affect the usable life of light emission.
  • LED lights are free of toxic chemicals as most conventional fluorescent bulbs contain mercury.  There is no health risk if an LED happens to break due to the fact it is a solid-state object.
  • LED lighting can improve security and safety with the efficiency, long life and weather resilience by keeping the lights on for longer periods of time.

LED INCOME STATEMENT BENEFITS:

  1. Tax Reform Legislation

On Dec. 22, 2017, President Donald Trump signed the Tax Reform legislation. The bill largely takes effect in 2018 and makes significant changes that impact most, if not all taxpayers.The act increased bonus depreciation and Section 179 expense for business taxpayers.

Bonus Depreciation: Under the previous tax rules, the bonus depreciation deduction was limited to 50 percent of eligible new property. The Reform extends and modifies bonus depreciation to allow businesses to immediately deduct 100 percent of eligible property placed in-service after Sept. 27, 2017, and before Jan. 1, 2023. For certain property with longer production periods, the 100 percent bonus depreciation is extended through Dec. 31, 2023.

Bonus depreciation continues to be available for qualifying property, which is generally property with a depreciable recovery period of 20 years or less. Plus, eligible property is expanded to include used property.

Section 179

Section 179 allows a taxpayer to immediately expense the cost of qualifying property – rather than recovering such costs through depreciation deductions. However, the Tax Reform increased the maximum amount a taxpayer could deduct under Section 179 for property placed in-service after Dec. 31, 2017, from $520,000 to $1,000,000. The phase-out threshold is also increased from $2,070,000 to $2,500,000 for property placed in-service after 2017. The phase-out occurs when total Section 179 property placed in-service during a tax year exceeds the threshold amount. At this point, the deduction is reduced dollar-for-dollar by the excess amount. Both the deduction and phase-out limit will be increased for inflation beginning in 2019.

Qualifying property for Section 179 expensing has been expanded under recent Tax Reform.  While you can claim a Section 179 deduction for most kinds of property or assets, there are some types of assets that don’t qualify:

  • Real property – Buildings, land and land improvements (this includes swimming pools, paved parking areas, docks, bridges and fences)
  • Air conditioning and heating equipment
  • Property used outside the U.S.
  • Property used to furnish lodging
  • Property acquired by gift or inheritance, or purchased from related parties
  • Any property that isn’t considered to be personal property may not qualify.

Property that does qualify includes:

  • Equipment purchased for business use
  • Tangible personal property used in business
  • Computers and off-the-shelf software
  • Office furniture and office equipment
  • Business vehicles can also qualify if they have a weight of more than 6,000 pounds (other limits may apply).

Whatever you deduct through Section 179, you must use the property or asset at least 50 percent of its life for business purposes. If personal use exceeds the 50 percent cap, you’ll have to depreciate the item instead.

Utility and Maintenance Savings: The utility and maintenance savings begin immediately after conversation to LED lighting and reduces expenses and improves profitability on the Income Statement.

Case Study

SUMMARY: This January 2018 project consisted of converting the interior lighting to LED across three buildings on this corporate campus totaling 518,000 square feet.  The project involved retrofitting just more than 8,094 interior fixtures and during this conversion, about 50% of the interior fixtures were de-lamped from three 32W lamps to two 12W lamps over a three and-a-half-week period.

UTILITY SAVINGS: Reduced total annual kWh usage went from 2,758,461 to 812,350 kWh – a 71 percent reduction in kWh

COST SAVINGS:

Est. Annual kWh Reduction

1,946,111

Average Effective Utility Rate

$0.073

Est. Annual Utility Savings

$142,661

The annual cost savings went directly to the bottom line improving EBITDA

FINANCIAL IMPACT

FINDINGS

The earlier in the year a facility converts to LED lighting the more months they can enjoy the cost savings and improved EBITDA

If you would like to explore and evaluate the type of savings your business could benefit from LED Lighting, contact ASG Energy at 210-610-0036 or email at info@asgenergyllc.com.


Disclaimer - Any tax advice in this communication is not intended or written by us to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed by any governmental taxing authority or agency, or (ii) promoting, marketing or recommending to another party any matters addressed herein.

The opinions and analyses expressed herein are subject to change at any time, as are statements of financial market trends, which are based on current market conditions. Any suggestions contained herein are general, and do not take into account an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Any third party information contained herein is from sources believed to be reliable, but which we have not independently verified. Past performance is not indicative of future results. Investments in securities may lose value, and fees, charges, and taxation can have an adverse effect on investment returns. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument.

No warranty or representation, express or implied, is made by ASG Energy, nor does ASG Energy accept any liability with respect to the information and data set forth herein. Distribution hereof does not constitute legal, tax, accounting, investment or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein.

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Keith McAslan

Keith McAslan is a managing partner of ASG Energy LLC. a Colorado based national full-service company dealing exclusively in LED lighting. The business has a successful track record of managing LED lighting installations for Fortune 500 customers, medical centers and schools that generates cost savings with a payback typically less than three years, reduces greenhouse gasses and improves facility lighting and safety. McAslan has executive leadership experience for over 38 years as a CEO, president, global general manager, and CFO in private, private equity and publicly owned consumer and industrial products businesses. Keith has successfully executed buy, build and sell strategies for private equity firms (Blackstone Group and The Sterling Group) and led turnarounds as a CEO, president, COO and CFO. Keith has completed domestic and international acquisitions with successful integrations and managed global operations. Keith’s experience advising private equity investors and portfolio company management teams as an operating partner has increased enterprise value for the investors. McAslan mantra with organizations he leads is: “If you are not selling or supporting selling you are just overhead.” Connect with Keith: -https://www.linkedin.com/in/keithmcaslan/; www.asgenergyllc.com; or keith.mcaslan@asgenergyllc.com

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