Major tax reform may be on the horizon for commercial HVACR contractors.
The HVAC Expensing and Technology (HEAT) Act, HR 3515, which was recently introduced by Reps. Pat Tiberi, R-Ohio, and Ron Kind, D-Wis., includes provisions that will allow commercial building owners to expense qualified HVAC equipment.
The bill would allow taxpayers to write off the cost of a qualified HVAC expense from capital accounts. Any cost so treated shall be allowed as a deduction for the taxable year in which the equipment is placed in service.
Not only would this tax help commercial building owners, it would also benefit contractors, manufacturers, and distributors as well. It would also encourage system replacements by incentivizing the replacement of aging equipment with new technologies, which would promote energy and cost savings regarding comfort-based expenditures.
The HVACR Industry Alliance — a coalition of 11 national HVACR trade associations, including ACCA; Air-Conditioning, Heating and Refrigeration Institute (AHRI); ASHRAE; Heating, Air-Conditioning, and Refrigeration Distributors International (HARDI); Sheet Metal and Air Conditioning Contractors National Association (SMACNA); and others — has been working tirelessly for quite some time on behalf of this bill.
A similar incarnation of the bill emerged as the Protecting Americans from Tax Hikes Act, or the PATH Act, in 2015. While promising at the time, a subsequent expansion of Section 179 of the tax code removed an exclusion that prohibited the ability to expense HVACR products as capital equipment.
“The PATH Act was signed into law by President Obama, and, along with a handful of other things, it implemented Section 179D expensing for HVACR equipment explicitly in its own clause,” said Jon Melchi, vice president, government and external affairs, HARDI. “However, the IRS had a discrepancy with their classification of HVACR equipment under Section 1250 Real Property, and because of that, the expensing that the PATH Act would have allowed got locked-up as un-implementable.”
Since then, organizations have shed a light on how this tax code would benefit all involved in the HVAC industry, from contractors to distributors alike.
“I think the one thing we are so lucky to have is support from Congressmen Tiberi and Kind, who are such well-respected members of the Ways and Means Committee. Their backing absolutely increases the likelihood and prospect that we might get movement on this,” said Melchi. “Two of the most well-respected members of Congress have shown an ability to work together in a bipartisan way to get things done, so having their support in this is a very strong endorsement.
“I think, as an industry, we thought we had a fix to this at the end of 2015, which unfortunately didn’t happen,” Melchi continued. “We’ve been on and off about addressing this issue, but I think what’s happened is that when our HARDI members visited Capitol Hill, along with other members in the industry, and discussed the challenges they’ve had, there seems to be a universal agreement that this is not the best way to reflect the expense of this for building owners.”
Barton James, senior vice president, government relations, ACCA, is hopeful that bipartisan support will see the HEAT Act through this time.
“There may be a new name for it, but expensing equipment and an interest in shorter equipment life spans has been around for a long time,” said James. “It’s been on the books and on our to-do list. I think everyone is trying to push up to the wall of tax reform. This has had traction in the past, and we’re having another great run at it. Now, the opportunity is even better as tax reform was a major component of President Trump’s presidential campaign.”
WHAT YOU NEED TO KNOW
The real payoff with the HEAT Act is allowing for a faster depreciation schedule as opposed to the current 39-year depreciation mark.
“Having an immediate or faster depreciation schedule creates a ripple effect,” said James. “When building owners make the investment in HVACR equipment, there is a ripple effect to manufacturers, contractors, and distributors. If installed correctly, more efficient equipment will not ‘limp’ along. Right now, with such a lumped depreciation schedule, systems are operating well beyond their life cycles. By wrapping it up, this gives consumers or building owners a reason not to have their equipment limping along.
“Furthermore, contractors can use this as a marketing piece,” James continued. “They can now say, ‘Hey, because the HEAT Act passed, you can now expense your investment in your old equipment sooner, and we have the right energy-efficient equipment available right now that will allow you to expense this cost on your taxes.’”
If expensing were allowed, it would encourage and enable building owners to replace their older, less efficient equipment with today’s newer models, which would save money for them and energy for the nation, said Francis Dietz, vice president, public affairs, AHRI.
“Building owners are currently unable to expense HVACR and water heating equipment as capital expenses, and this bill would enable that,” he said. “The only avenue currently at their disposal is depreciation, but the existing 39-year schedule is ridiculous.”
The HEAT Act is a great benefit for those looking to expand their products and services, Melchi said.
“If there’s one thing we learned during the Great Recession nearly a decade ago, it’s that we are increasingly seeing contractors and distributors who are wanting to diversify their businesses and not be so tied to residential,” he said. “They are interested in expanding into light commercial, plumbing, or other services. We think this gives people an opportunity to get their feet in the door if they’re interested in diversifying their businesses. This will absolutely expand opportunities for local manufacturers, distributors, and contractors.”
So, what do organizations say are the top three benefits to this tax deduction?
“More modern and efficient equipment, the ability to save money on energy bills, and energy savings in general,” said Dietz.
This will provide an increased opportunity for sales for all parties involved in the industry, said James.
“The HEAT Act will expand contractors’ abilities to have stronger relationships with existing customers and potentially make them aware of the opportunities that the HEAT Act provides them,” James said. “Finally, energy efficiency is not a dead issue. There are still ways to promote energy-efficiency issues and a need to keep working on that.”
“The most immediate benefit for building owners is that they can replace aging equipment with some of the new technologies our manufacturer partners are producing and provide enhanced comfort to people in the building,” added Melchi. “They’re also going to save money on their utility bills. By saving money, they can now invest in people, projects, and all sorts of things that were getting sucked up before. Finally, the biggest benefit to the industry directly is that we believe this will expand opportunities for local manufacturers, contractors, and distributors.”
WAIT AND SEE
While the HEAT Act would be beneficial to the industry, it could take some time and effort to see that it is made into a law.
“It is important to make clear that this bill was only just recently introduced, and it can take time to wade through the legislative process,” said Melchi. “No business can claim anything until it’s signed into law, and it’s still a long way from getting signed into law and taking effect, if it even gets that far.”
With that being said, Melchi said there are a handful of factors making the “perfect storm” for movement on this policy in this legislation in the very near future.
“First, it’s a bipartisan bill with two introducing cosponsors on the House Ways and Means Committee, which essentially controls the bulk of the policy-making process,” he said. “That committee determines what gets taxed and where revenues come from for policy implementation. Second, this bill is not an incendiary topic, and it appeases Republicans in that it is a technical fix to the tax code and Democrats in that it opens the door to expanding energy-efficiency practices. Also, this new administration and Congress are making it a key point to attempt comprehensive tax reform within this first year, which in order to succeed, needs to be tackled starting in the next month.
“Going forward, there are two potential outcomes,” continued Melchi. “Congress actually tackles comprehensive tax reform in a meaningful way, which would include larger-scale expensing provisions that would encompass what the HEAT Act would implement. If this is where the conversation is heading, then we run with it. On the expensing front, there are a lot of other complicated tax reform issues that we’ll have to monitor and react to as well.
“This is very much on the table, among a bunch of other options for tax reform, but we’ll get a clearer picture when they start talking about it more and dive into tax reform talks in the coming weeks,” Melchi said.
The other outcome would be Congress balks at comprehensive tax reform altogether.
“Perhaps Congress ‘Charlie Browns’ it and flubs tax reform like it did health care reform,” continued Melchi. “Congress may then be forced to slop together a ‘light tax reform package’ before the end of the year so it takes effect when people file their taxes for the 2018 year in 2019. That, in reality, is just a hodgepodge of a bunch of small fixes, and it’d be our aim to push the HEAT Act provision to be included in one of those.”
Publication date: 9/25/2017