Explaining the Connection Between Power Factor Correction and IRS Section 179
If you’re a business owner or stakeholder to the financial health of a company looking to reduce energy costs and potentially maximize tax benefits, Power Factor Correction (PFC) might be a solution worth considering. There is much confusion and uncertainty when terms like Power Factor Correction is mentioned. I would like to take a few moments and describe what PFC is, how it can save you money, and how IRS Section 179 can make it even more advantageous.
What is Power Factor Correction?
Power factor is a measure of how efficiently the electrical power delivered is being used by your facility and equipment. Power Factor is measured by a number established by your energy utility as a numeric expression, either 0.0-1.0 or 0%-100%. A low power factor indicates a significant portion of the electrical power is wasted, but your company is charged for. Power Factor Correction is an equipment installation that improves your efficiency, which ultimately reduces energy consumption and costs.
How Power Factor Correction Saves You Money
- Lowers Electricity Bills: By improving power factor, you reduce the amount of reactive power drawn from the electrical grid. This results in lower electricity bills.
- Reduced Demand Charges: Many utilities impose demand charges based on the highest amount of power used during a specific period. Improving power factor can help lower these charges.
- Eliminate Power Factor Penalties: Little known, most utilities impose a “Power Factor Penalty” for operational efficiency under 0.95 *(1)
- Equipment Efficiency: A higher power factor can improve the efficiency of electrical equipment, leading to longer equipment life and fewer repairs.
IRS Section 179: A Tax Break for Energy Efficiency (2)
IRS Section 179 is a tax deduction that allows businesses to deduct the full cost of qualifying equipment purchased or leased during the current tax year. This includes equipment used for energy efficiency, such as power factor correction equipment.
Benefits of Section 179:
- Immediate Deduction: Instead of depreciating the equipment over several years, you can deduct the entire cost in the year of purchase.
- Cash Flow Improvement: The tax savings can be used to invest in other areas of your business or improve cash flow.
- Stimulates Investment: Section 179 encourages businesses to invest in equipment that improves efficiency and productivity.
Is Power Factor Correction Right for Your Business?
To determine if power factor correction is a worthwhile investment for your business, consider the following:
- Current Power Factor: A low power factor indicates a greater potential for savings.
- High Electricity Rates: Electricity rates & fluctuation may make PFC more attractive.
- Demand Charges: If you have significant demand charges, PFC can help reduce them.
- Equipment Age: Older equipment is more likely to have a lower power factor.
By combining the energy savings from power factor correction with the tax benefits of Section 179, businesses can significantly improve their bottom line.
Disclaimer: This is intended for informational purposes only and does not tax or financial advice.
Keywords: power factor correction, IRS Section 179, energy savings, tax benefits, business, electricity, equipment efficiency
