All eyes have been on Donald Trump and the Republican-led Congress as they attempt to make good on the campaign promises that earned them the White House and majority positions.
On April 26, the Trump administration released a broad outline of its tax reform proposal, which would drastically alter the existing tax code. Some of the highlights in the plan include:
- Tax Brackets: The plan would reduce the number of tax brackets from seven to three with rates of 10, 25, and 35 percent. The top rate would not apply to pass-through income, which would be taxed at 15 percent (along with the corporate tax rate);
- A full repeal of both the estate tax and the alternative minimum tax;
- Elimination of many deductions, including the ability to deduct state and local taxes from reported income; and
- The standard deduction would be doubled ($6,300/single and $12,600/married and filing jointly), while the mortgage interest and charitable contribution deductions would remain in place.
While many officials representing several leading HVACR industry associations applaud the administration’s initial efforts on tax reform, they’re still actively lobbying in Washington on the industry’s behalf.
Among the biggest concerns they’re bringing up are the Border Adjustment Tax (BAT) and the encouragement of reinstating market-driven tax incentives for energy efficient equipment, especially 179D and 25D.
The BAT is a newly proposed tax that would impose a 20 percent tax on imports and reduce taxes on exports. Essentially, the tax would be levied based on where a good is consumed rather than where it is produced.
“The border adjustability tax is a tough sell,” said Jon Melchi, director of government affairs, Heating, Air-Conditioning, and Refrigeration Distributors International (HARDI). “I’m not sure it’s going to get through the House let alone the Senate with 51 votes.”
Those opposed to the tax say it will raise prices on goods while making it more expensive to ship products overseas. Supporters, including Trump, believe it could create new jobs, spur domestic production, and raise more than $1 trillion.
Industry members are asking Congress to consider reinstating tax incentives, such as 25D and 179D, which promoted energy efficiency by encouraging owners to purchase high-efficiency products via tax credits.
Section 25D, or the Residential Energy Efficient Property Credit, was implemented on Jan. 1, 2006. It allowed for a credit of up to 30 percent on qualified solar electric systems, solar water heaters, fuel cell property, small wind energy property, and geothermal heat pumps expenditures. Congress recently elected to discontinue the credits for all technologies except certain solar energy applications, which were extended through 2021.
Prior to the expiration, the credit also applied to commercial buildings and allowed building owners to deduct up to $1.80 per square foot on existing commercial buildings’ heating, cooling, ventilation, or hot water systems that reduce the building’s total energy and power cost by 50 percent or more based on requirements set by ASHRAE Standard 90.1-2007 for the 2015 and 2016 tax year.
Another popular target is 179D, which was originally passed by Congress as part of the Energy Policy Act of 2005. This tax incentive granted building owners and tenants who spent money constructing or renovating more efficient commercial structures a one-time depreciation deduction of up to $1.80 per square foot based on ASHRAE 90.1-2001 (and later 90.1-2007) standards.
The tax credit also allowed businesses to write off qualified investments, like trucks, computer software, and office furniture, but exempted heating and air conditioning products.
“The ideal outcome is to have the most robust tax reform possible,” said Kelley Raymond, director of government relations, Air-Conditioning, Heating, and Refrigeration Institute (AHRI). “The depreciation rate is not in line with our equipment.”
OVERALL TAX REFORM
Those working in Washington are eager to work with the Trump administration in hopes of emerging with a more honest tax code.
“In order for the industry to be successful, federal tax codes need to provide alternative depreciation schedules that reflect actual equipment lifespans and allow for accelerated expensing while promoting quality installation and maintenance of energy efficient equipment,” said Barton James, senior vice president of government relations, ACCA.
Reinstating these tax incentives encourages homeowners and commercial building owners to purchase higher-efficiency products, which is a win for both customers and contractors as contractors can sell more and customers can receive a better piece of equipment with greater return on investment.
“The future really depends on how much the industry has on these issues,” said Melchi. “I don’t know that they will be overturned necessarily. Right now, because of the Republicans’ failure to get anything done on health care, it throws into question if they are going to be getting anything wholesale done. Republicans were counting on savings from the repeal of the Affordable Care Act and taxes within the Affordable Care Act being applied toward tax reform, but because they couldn’t get those savings, now there are fewer dollars to work with and less money to cut taxes, unless revenue is raised in other places. Now, it’s harder to work outside of the box to find other sources of revenue. I think it’s going to be challenging.”
However, not everyone sees it that way.
“I believe Congress will act on it this year, because they have pressure on them to have at least one of these Republican campaign promises met,” Raymond said. “The people were promised significant accomplishments in year one, and it’d be folly to ignore the momentum that comes after an election. There were lots of good lessons in the health care vote. Tax reform is the most equally agreed upon important item to get done now.”
“November 3, 2020, may seem a long way away for most, but in our current political climate, the president and Republican Congress have a short window – 14-20 months – to secure accomplishments before 2020,” James said. “With that said, yes, having worked with Paul Ryan since he came to Washington, I have a lot of faith in him and his staff. I think they can get something we can call tax reform to President Trump and get it approved.”
CONTRACTORS’ TAKE ON TAXES
“Most conversations HVACR industry representatives are bringing up center on corporate tax reform for the corporate tax rate,” Raymond said. “The HVAC industry is focused on the lowest possible rate, so companies are unaffected.”
Many contractors insist a lower tax rate would help.
“Taxes are too high,” said Butch Welsch, president, Welsch Heating and Cooling, St. Louis. “We don’t get the feeling that our money is being spent wisely. The government has gradually increased the tax rates and reduced reductions over the last eight years. This has been difficult, because despite what might have been written in the press, it took much longer for business to turn around for small businesses like ours. As a result, it was a double problem for us. The government has shown that the more money it has, the more it will spend. It would be a good soul-searching exercise for the government to take a look at all of the wasted expenditures and remove those that are really unnecessary and often put a burden on businesses in the form of regulations.”
Aaron York Sr., founder, Aaron York’s Quality Air, Indianapolis, agreed that taxes are way too high.
“Not only are taxes too high, there’s too much money being squandered,” he said. “The money spent has increased substantially more than the rise of inflation and is hampering business growth. It seems the government views businesses as a fountain of wealth to be continually tapped. Higher taxes reduce the incentive to expand and grow since the government will only take more and more of what is earned. The more we earn, the higher they raise the tax rate.”
Rob Minnick, CEO and president, Minnick’s Inc., Laurel, Maryland, said he has seen an approximate 5 percent increase in taxes over the past several years but avoids the negative impact through precise planning.
“We’ve planned accordingly, so it hasn’t been too difficult to deal with,” he said. “There’s not too much we can do other than vote.”
The lower the tax rate, the more money available to reinvest into the company, said Minnick.
“I could and would use that money on more training and benefits for our employees,” said Minnick.
Welsch said any freed up money would be spent to improve his facilities, improve his business’s software and computer systems, and reinvest in the general operations necessary to grow.
“Any sort of tax reduction would have a positive impact on the business’s willingness to invest in the future,” Welsch said.
York Sr. said lower taxes would lead to a greater rate of investment.
“Less government and unwieldy regulation takes the handcuffs off of business expansion with reduced tax rates,” York Sr. said.
Contractors say they are hopeful for the future of the corporate tax rate and believe change is coming soon — maybe not tomorrow, but in the near future, especially under the new president.
“Realistically, I think President Trump and company can accomplish this, but it’s more hope than expectation,” York Sr. said. “Tax reform must be done in concert with business needs and opinions.”
“Despite what occurred with the Affordable Care Act debacle, I believe Trump’s administration will be able to achieve some tax relief because there is enough public sentiment for tax reform,” said Welsch. “I believe there are enough intelligent people with sufficient knowledge who can come up with a solution if politics are put aside. This will take some admitting that we tried it, it didn’t work, and now we are going on to something else. That’s hard for politicians, but I remain hopeful.”
Publication date: 5/8/2017