Comprehensive tax reform is a presidential signature away from becoming a reality.
The Senate voted 51-49 to pass its version of tax reform during the early morning hours of Dec. 2, and the House approved its version, HR 1 — the Tax Cuts and Jobs Act — by a vote of 227-205 on Nov 16.
Both bills will now enter a conference session where House Representatives and Senators will aim to sort out the differences in the plans and finalize the bill’s framework.
The final legislation would then land on President Donald Trump’s desk and become law following his signature.
While the bill is not yet final, several individuals representing HVACR manufacturer, contractor, and distributor organizations believe the proposed tax legislation embodies a victory for the industry.
A WORK IN PROGRESS
“In my gut, I always felt like they would get this done,” said Mark Riso, vice president of legislative affairs, Plumbing-Heating-Cooling Contractors Association (PHCC). “So often we hear Congress’s acknowledgement that small business is the backbone of America, but I can rarely point to examples where they actually back that up. This is one of those examples. We’re thrilled that Congress is acting on tax reform for the first time in a generation.”
REPEAL OF THE ESTATE TAX
The HVACR industry strongly supports the repeal of the estate tax, which is included in both the House and Senate bills.
Currently, the estate of a deceased individual is subject to a 40 percent federal tax when it exceeds $5.5 million for individuals or $11 million for couples. The fair value of all assets, including cash, stock, real estate, business interests, etc., is taken into account.
The House bill doubles the exemption to $11 million for individuals and $22 million for couples and repeals the entire tax after 2023. The Senate version also doubles the exemptions but fails to repeal the tax.
“From a HARDI perspective, one of our goals for several years has been the repeal of the estate tax, and these bills accomplish that,” said Jon Melchi, vice president, government and external affairs, Heating, Air-conditioning & Refrigeration Distributors International (HARDI). “Estate planning is hard enough without Uncle Sam butting in. This will immediately free up more working capital for businesses. Our members can now focus on growing through the generations rather than how they are going to come up with the money they owe the government.”
Stan Kolbe, director of legislative affairs, Sheet Metal & Air Conditioning Contractors’ National Association (SMACNA), said the association’s goal has always been to try and make transfer of business at death a non-taxable event.
“This goes way beyond business and farms,” he said. “The exemption would be bumped up to $22 million from $11 million. From a business standpoint, if your dad passes the family business to you, there shouldn’t be a consequence to the business simply because he died. We’re happy to see the repeal of the estate tax included.”
CORPORATE TAX RATE
Among the major milestones in both bills is the reduction of the corporate tax from 35 percent to 20 percent. The House bill would enact the 20 percent rate immediately while the Senate version would start in 2019.
Kolbe said this is great news for several of the association’s larger contractors and associate manufacturing members.
“SMACNA contractors do a lot of major commercial projects, including buildings, museums, universities, power plants, subways, and more,” he said. “There aren’t many big projects we aren’t somehow involved with. For those who apply, the lowered corporate rate is a big plus.”
While many applaud the corporate and individual tax rate reductions, the exemption for pass-through entities has also drawn some attention.
Under current law, profits from a small business “pass through” to the owner and are taxed at his or her individual rate, which can be as high as 39.6 percent.
The Senate’s bill will allow business owners to deduct 23 percent of their income while the House plan would establish a 25 percent rate.
“We have a concern with the pass-through rate,” said Barton James, senior vice president of government relations, ACCA. “As a whole, it’s not bad, but we’d like to see it proportional or higher than the corporate rate. It’s unfortunate how quick Congress forgets that small businesses are truly the drivers of employment. Anything they can do to help small businesses would have a huge ripple on our economy.”
Riso said he’s pleased with Congress’s action regarding the taxation of pass-through entities.
“We’re happy with what the House has passed,” he said. “We have members on both sides — S and C corps. — and we’re happy with what the House and Senate have done. Anything is better than what we’ve had up to now.”
Melchi said HARDI supports the concept of lowering the pass-through rate, but has some concerns on how it will be implemented.
“Congress wants to implement a 70-30 rule, which is 70 percent of a business’s income is essentially a salary and 30 percent is an investment. This doesn’t jive with our numbers,” he said. “If I was a manufacturer’s rep., I’d be very concerned about this, as it appears to disadvantage those who are not producing or directly selling something. That’s something the industry needs to be aware of.
“It doesn’t take a genius to figure out the U.S. corporate tax rate is significantly higher than other nations, which makes us less competitive globally,” Melchi continued. “We’re less concerned with what the rates are on paper than what the effective rate is for our members. Historically, wholesalers and retailers have paid a higher effective tax rate than everyone else. We want it to be balanced out with a code and rates that are fair to those companies that operate primarily in the domestic space.”
EXTENDING EQUIPMENT EXPENSING
The HVAC Expensing and Technology (HEAT) Act, HR 3515, which was initially introduced by Reps. Pat Tiberi, R-Ohio, and Ron Kind, D-Wis., is included in the House bill.
The HEAT Act includes provisions that 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 as a deduction for the taxable year in which the equipment was placed in service.
The Senate version allows full expensing of short-lived capital investment, such as machinery and equipment, for five years; increases the Section 179 small business expensing cap from $500,000 to $5 million with the phaseout beginning at $20 million; and maintains current depreciation schedules for real property.
The House version mirrors the Senate’s language, except it raises the cap to $1 million with a phaseout starting at $2.5 million and shortens the depreciation of real property to 25 years.
“From the expansion of 179 expensing to the HEAT Act, there’s a lot to be excited about,” Melchi said. “Not only do businesses get to expense more of their capital improvements, but HVAC is now included in that. I consider that a victory for the HVACR industry.
“The HEAT Act will help contractors who are in the commercial space or are interested in getting into that space,” Melchi continued. “This will help them sell those products and grow in that sector. If this plan does what House Republicans say it will, which is put more money in the pocket of consumers and homeowners, that’s good for business.”
James said the inclusion of the HEAT Act and 179 is pretty darn exciting.
“These are investments in energy-efficiency technologies,” he said. “As contractors, you can now remind consumers of this. Instead of limping through repairs, they may be more willing to spend the money now rather than waiting and risking its expiration.
“Not only will this help commercial building owners, it will also benefit contractors, manufacturers, and distributors,” James continued. “It will also encourage system replacements by incentivizing the replacement of aging equipment with new technologies, which will promote energy and cost savings regarding comfort-based expenditures.”
Tax-exempt private activity bonding (PAB) appears to be on the chopping block per the House bill while the Senate bill retains the funding. Both bills are silent on extending 179D retrofit incentives but do boost the Section 179 expensing section, along with the combined heat and power (CHP) incentives included in the HEAT Act. Some members in the Senate are discussing moving a tax extender bill for those items left on the table sometime in the near future, perhaps when they return from the holiday break in January.
PABs are issued by state or local governments and loaned to private companies to finance qualified projects. Approximately 38 percent of those funds are used on nonprofit hospitals, 20 percent on affordable housing, 14 percent on nonprofit colleges and universities, etc.
Kolbe called the loss of private activity bonding and infrastructure support very troubling.
“These funds are used to build airports, toll roads, hospitals, schools, and more,” he said. “The airport industry is saying this negative tax change cuts them off at the knees as far as financing major airport work is concerned. The tax bill is running the deficit up $1.4 trillion, and the debt agreement is being breached without additional cuts in a number of places. The White House is already asking for big cuts to offset the deficit impact of the second hurricane relief package and wants to take about $1 billion out of transportation infrastructure budgets. We’re on the verge of losing private activity bonds, the historic district credit, the ability to rehab low-income households, the new markets credit, and more. We have a number of concerns for any tax bill. These include its impact on the construction economy, our industry project volume, and, most importantly, its impact on the profitability/tax liability of our firms.”
The bill completely overlooks infrastructure, which has many concerned.
“If only this tax package had a boost to infrastructure as long promised, it would make local and state governments a bit less concerned,” Kolbe said. “If the feds aren’t going to spend the money, local municipalities will have a lot of pressure regarding that money. There’s a lot of nervousness, but budget panic in city halls hasn’t set in yet.”
Kolbe has yet another concern with the capping of mortgage interest deduction, which he said has an odd but direct effect on construction activity and public and private project volume.
“Property tax is based on property values,” he said. “Taking the deduction away from real estate will negatively impact property values, especially if you live in expensive areas, like San Francisco, Chicago, New York, etc. If you drop property values, there’s less property tax. There’s a feeling there will be less construction and less money in municipal and state budgets. If state tax coffers are reduced, each local community will be impacted. A big boost to the debt and a different interest rate posture by the new Federal Reserve chairman could raise borrowing costs just when the financial options for public and private projects is shrinking.”
“Our member manufacturers strongly support Congress’s efforts to simplify the tax code and reduce rates,” said Stephen Yurek, president and CEO, Air-Conditioning, Heating & Refrigeration Institute (AHRI). “AHRI applauds the inclusion in HR 1 of full and immediate expensing, a permanent reduction in the corporate tax rate to 20 percent, a reduced rate for pass-through entities, repeal of the estate tax, and extension of the tax credit for geothermal HVAC equipment — all of which will serve to make the U.S. a more competitive place to do business.”
Joe Trauger, senior vice president, policy, and government relations, AHRI, said tax reform is a priority for AHRI.
“I am pleased to say that we did have an impact on some provisions of the tax reform bill in the House as it was going through committee,” Trauger said. “We were able to work with our industry allies to make sure HVACR was included in the products that can be immediately expensed, which is a provision in the tax code that allows for immediate expensing of capital improvements. This is a great thing for the industry going forward.”
James supports the Senate’s decision to increase the pass-through deduction in the Senate bill to 23 percent.
“This is a big win for contractors,” he said. “The pass-through provision in the House-passed legislation is not ideal, and we applaud the Senate for standing up for the small businesses in America. Victories like this wouldn’t be possible if ACCA and other associations weren’t on Capitol Hill reminding Senators that small businesses are the true economic drivers of our Country. ACCA will continue our fight to ensure this improved small business rate makes through the conference and onto the president’s desk in the final tax reform package.”
While not perfect, this legislation accomplished a lot on behalf of the industry, said Todd Washam, director of industry and external relations, ACCA.
“As a country, any time a bill is viewed as perfect, there’s likely something wrong with it,” he said. “If everyone is a little unhappy, you’ve probably got something worthwhile.”
While Republicans obviously were seeking a signature legislative victory, there is a bit of irony that it occurs in the form of tax cuts, Kolbe said.
“We have a political action committee that keeps an eye on every district nationwide, and most polls show tax reform is not a high priority among the Republican base,” he said. “It hovers around 30 percent. Tax reform actually ranks seventh nationally behind health care, foreign affairs, etc. But, the Congressional leadership was hungry for a ‘win.’
“Historically, big tax cuts or reform bills have not been followed by electoral successes for the party in control in the next election, so this is a tough call on the impact of a bill passing on the 2018 election,” continued Kolbe. “In fact, in almost every example, significant losses have followed for the party in control at the time a major tax bill was enacted into law. To date, this package is not very popular, so there was less pressure to vote for it in the Senate by wavering Senators concerned about the deficit or particular provisions impacting their states or leading industries based there, but the leaders in the Senate were able to gather the necessary votes.”
Melchi said he’s pleased that Congress was able to get this over the goal line.
“The president was elected just over a year ago, and a lot of things on his major agenda haven’t been touched,” he said. “I think Republicans knew they needed to produce something on taxes, or the folks who supported their campaigns in 2016 were going to be staying home come the mid-term election.”
President Trump will likely do this with a fair amount of pomp and circumstance, Riso predicted.
“I can picture a national broadcast on Christmas Eve where Trump signs this into law and wishes America a very merry Christmas,” he said. “And, I agree, this is quite a great gift to Americans.”
Publication date: 12/11/2017