As of this year, the costs of certain energy efficiency improvements can now be immediately deducted as business expenses rather than recovered far more gradually through decades-long depreciation schedules. The Tax Cuts and Jobs Act (P.L. 115-409), signed into law December 22, 2017, made big changes to the expensing tax provision that SMACNA and its members had long advocated for to reform the IRS Sec. 179.
Now for the first time many energy efficiency improvements to HVAC and related efficiency upgrades will qualify for favorable tax treatment under IRS section 179 expensing tax rules. As of this year, the costs of certain energy efficiency improvements can now be immediately deducted as business expenses rather than recovered far more gradually through decades-long depreciation schedules.
In the past, when a business made a purchase, it had to make an accounting decision whether to capitalize or expense a cost. There were outdated and complex rules that applied which guided this decision. In the case of energy efficiency measures like heating and cooling systems, lighting, and roofing, the costs have generally been capitalized and depreciated over a period of time consistent with Generally Accepted Accounting Principles (GAAP).
The depreciation period was much longer than the expected useful life of the measure, which meant that businesses had to “write off” the undepreciated value. This amounted to a disincentive to make replacements and caused businesses to turn to repairs to keep older, inefficient equipment up and running. This disincentive has prevented businesses from financing major retrofits and fully realizing considerable energy efficiency savings. Now, businesses can expense the cost of new, efficient measures all at once, which eliminates that disincentive in out-years and encourages the installation of replacements instead of repairs.
Explaining the New Expensing Provision to HVAC Clients.
Historically, HVAC system capital investments have been depreciated over a timeline up to 35 years, depending on a building owner’s specific tax situation. The new tax law now allows HVAC system investments made on or after January 1, 2018 to be fully expensed (for investments up to $1,000,000/building), which can have a significant impact in first year cash flow and project return on investment (ROI) for the building owner. The impact can change decisions relating to repair-vs-replace or whether an energy retrofit project is a smarter move for energy efficiency clients, especially once they are aware of the expensing change after consulting their tax advisors on how to proceed.
Bonus Depreciation Impacts HVAC Equipment, Lighting as well as Roofing System Efficiency.
The “bonus depreciation” section of the new tax law also recognizes the value that certain building infrastructure components play and that each deserves immediate expensing as opposed to long-term depreciation. The roof is a prime example. By reducing the first cost of roof replacement by approximately 28 to 30 percent, this should incentivize building owners to upgrade their insulation levels and incorporate higher performance roofing systems to boost building resilience and energy efficiency. The new tax incentives will speed up the payback for high thermal performance investments, a typical factor considered during roof improvements. Resilient roof design considerations will be more attainable under the new tax treatment of roofs, especially upgrading the existing building stock.
Without question, this tax change is just one contractors should consider with their accounting staff and marketing specialists as they promote efficiency options to clients. The statutory language from the new law is straight forward but should be reviewed with accounting and legal advisors.