Several tax provisions impacting the HVAC industry, including 25C, the expanded Section 179 expensing allowances, and the 179D Commercial Building Tax Deduction, are set to expire on Dec. 31, 2013. And although industry leaders agree that the provisions will probably be renewed, they also agree that it is unlikely to occur in 2013. That would again put some manufacturers, distributors, and contractors in limbo as they wait to receive word that the tax incentives are once again available.
Now You See It, Now You Don’t
The lengthy list of about 65 tax provisions that are expiring is the same list every year or two, said Charlie McCrudden, senior vice president of government relations for Air Conditioning Contractors of America (ACCA). “Congress passes these extender packages and then sits around until they get close to expiring again before they debate whether they’re necessary or effective provisions. They usually keep almost all in place.”
“Congress has discovered it can retroactively pass tax incentives,” said Guido Zucconi, assistant vice president of congressional affairs for the Air-Conditioning, Heating, and Refrigeration Institute (AHRI). “I don’t see them doing anything before the end of the calendar year, especially with the budget battles. Maybe in late winter or early spring they’ll get around to taxes. If you’re trying to incentivize someone to upgrade his home, this is ineffective.”
Section 25C, the Residential Energy Efficiency Tax Credit, was reinstated retroactively for 2012 on Jan. 1, 2013, as part of the fiscal cliff deal. The $500 tax credit, which was reduced from $1,500 just a few years earlier, can be used by homeowners to make energy-efficient improvements to their homes, including upgrades to the HVAC system. But, it is not the only tax provision on which industry organizations have a watchful eye.
“The three main ones we’re following are 25C; 45L, which is new home construction; and 179D, which is for commercial building retrofits,” Zucconi said.
The 45L credit is utilized by homebuilders, McCrudden explained. “If a homebuilder constructs a home to a certain standard, and, in order to meet that standard they have to use higher-efficiency HVAC equipment, then they can take a $2,000 tax credit.”
Section 179D, or the Commercial Building Tax Deduction, is also significant for building owners who have relied upon it to help make improvements to their buildings.
“This is the first expiration of this deduction that we’ve faced in a while,” McCrudden said. “This section was reauthorized in the Emergency Economic Stabilization Act of 2008 through the end of 2013 and allows a building owner to take a tax deduction based on certain qualified improvements to the building’s envelope, the lighting systems, and the HVAC system. Qualified improvements can yield deductions of up to $1.80 per square foot.”
Also expiring on Dec. 31 is the 50 percent depreciation bonus for small businesses. Bonus depreciation is useful to businesses purchasing new capital equipment, such as new service trucks. Extension of the generous depreciation bonus through the end of 2013 allows business owners to write off as much as 100 percent of the equipment and software they buy or finance, up to $139,000.
Industry Wary of Tax Provisions
This is not the first time tax provisions will likely be allowed to expire before being retroactively renewed. In 2012, the scaled-back 25C tax credit disappeared altogether, causing some outcry in the HVAC industry from those who utilized it most. In January of this year, President Barack Obama signed the American Taxpayer Relief Act of 2012, retroactively reinstating 25C to the beginning of 2012 and extending it through 2013.
“Our members have to buy equipment in advance,” said Jon Melchi, director of government affairs for Heating, Air-conditioning, and Refrigeration Distributors International (HARDI). “When the tax credit disappeared, they got stuck with a lot of inventory in a lot of cases. You have to be careful about relying on tax credits to move products.”
Congress’s tendency to procrastinate when it comes to passing tax provisions is causing many in the industry to shy away from utilizing the incentives. Instead, many are turning to private-party rebates and incentives to sell their products and services.
“The big boost to the 25C credit was a great idea, and it was effective,” Zucconi said. “Under the American Recovery and Reinvestment Act (ARRA), 25C gave credits of up to 30 percent or $1,500, whichever the homeowner reached first. That, quite honestly, motivated people who had to make a change or replace equipment. It made the decision to purchase higher-efficiency products affordable to a greater number of people. The higher initial price became very competitive with the minimum-efficiency products.
“That ran out of money in 2011, and the credits were allowed to continue to exist, but at pre-ARRA levels. They were limited to 10 percent of the cost with a specific cap of $300 for an air conditioner, $150 for a furnace, and $60 for a furnace fan. As you can see, that’s a huge, huge drop from $1,500. It’s not going to motivate homeowners to get the more efficient, more expensive equipment. There are lifetime caps now, too, so once you’ve applied it, that’s it.”
Unfortunately, due to the highly partisan climate on Capitol Hill, McCrudden said not to expect any changes any time soon.
“Lots of folks would like to see changes or modifications to some of these incentives, but it never happens,” McCrudden said. “If you change one, you have to change them all, and the impact on revenue losses is significant.”
Contractors Weigh In
Greg Crumpton, president and founder of AirTight Mechanical, Charlotte, N.C., said he understands the tax credits had a valuable purpose in helping to stimulate the market at the height of the recession several years ago, but said it’s time for the federal government to step back and let the free market do what it will.
“Let the free market set a business course that equipment manufacturers adapt to, let energy-selling companies figure out a true rate structure that is equitable across each region, and, ultimately, let the public set the policy on how we consume, purchase, and best utilize energy and the huge number of pieces that the energy business consists of,” Crumpton said.
Ann Kahn, owner of Kahn Mechanical Contractors, Dallas, said her company has utilized Section 179 over the past year by purchasing vehicles and expensing them in full. “This has had a big impact on lowering our tax liability,” she said. “In addition to truck purchases, we will be repairing the roof on our building and expensing the bill this year.”
However, if the provision is not renewed right away, Kahn said she “might buy new vehicles and make major repairs at a slower rate.” She added, “Hopefully, the legislation will continue and those responsible for the tax structure will see the restrictive nature of depreciation.”
Rich Morgan, owner of Magic Touch Mechanical Inc., Mesa, Ariz., said that 25C does not have nearly the same influence that it did a few years ago, though it is still sometimes enough to sway homeowners who are on the fence — especially if the credit is coupled with a significant manufacturer rebate.
“From a contractor’s perspective, every little bit helps. So, in my opinion, I would certainly like to see the tax credits remain in place,” he said. “In fact, I’d like to see them come back at $1,000 plus.”
To view a list of the tax incentives that are expiring at the end of 2013, visit http://bit.ly/2013TaxProvisions.
Publication date: 12/16/2013