Tax credits on the chopping block that impact your business

It’s that time of year again – closing in on the New Year and the prospect of the expiration of dozens of federal tax incentives. At midnight on January 1, 2014, approximately 57 popular federal tax incentives that help businesses — big and small — justify capital investment and growth will sunset unless Congress takes action.

Each year is the same frenzy in the House and Senate as Congress cannot commit to permanently fixing the tax code and, instead, relies on a series of short-term extensions. The cycle repeats itself every winter, but each year the discussion is a little bit different. I’ve talked about extenders in November and December so many times, the usual suspects are all too familiar: residential energy tax credits for individuals and homebuilders, expanded expensing limits, “bonus” depreciation and many more. This time around, for the first time in five years, a critical incentive for commercial building owners could run out. 

Anyone paying attention over the last decade knows “tax extenders” is part of the Capitol Hill vernacular. It’s easier for Congress to extend tax incentives for only one or two years because the “score” will be lower. Every time you lower tax revenues with credits and deductions, or relax the rules for expensing or depreciating assets, you lessen the total amount of revenues coming into the U.S. Treasury. A few years ago, the term “tax expenditures” came into vogue as a descriptor of incentives with a negative score.

Congress likes to use the tax code to affect behavior in support of a particular policy goal. When you give homeowners a tax credit for installing higher efficiency HVAC appliances, they should use less energy and have more left over after paying their utility bills. Limiting the window of opportunities for tax incentives lowers their score and makes it easier to find offsets in a budget-neutral world.

The following credits of interest to the HVACR community are all on the chopping block as we head into 2014:

Section 25C Residential Energy Tax Credit

The Section 25C residential energy tax credit that allows eligible home owners to claim up to $150 for installing a qualified furnace or $350 for installing a qualified central air conditioner, heat pump, or hot water heater, expires at the end of the year. Since 2008, the 25C tax credit has been extended four times. While this incentive may not directly benefit HVACR contractors, it may help you sell a higher performance product.

Section 179 Expanded Expensing Limit and Bonus Depreciation

The expanded expensing limits under Section 179 and the bonus depreciation allowances for small businesses that invest in new vehicles, equipment and other improvements have been around for decades and are very popular with the small business community and policy makers. These two incentives, which directly impact business owners, are due to expire at the end of the year.

Section 45L Home Energy Tax Credit

Several factions are working to extend the Section 45L home energy tax credit. Eligible homebuilders can take up to $2,000 for every home they build with qualified energy-efficient appliances, including HVAC equipment. 

Section 179D Energy-Efficient Commercial Building Deduction

The CBTD was first authorized by Congress in the Energy Policy Act of 2005 and  provides a maximum incentive of $1.80 per square foot for improvements to a building’s lighting, HVAC and envelope that result in at least 50% modeled energy savings when compared to a “reference building”. The expiration of this tax deduction was extended to December 31, 2013, by the Emergency Economic Stabilization Act of 2008. 

More on 179D

179D is one of the few energy use incentives targeting commercial building owners. Unfortunately, many building owners found the energy savings targets and the compliance costs too difficult to meet. As a result, there was little interest in the field for the full 179D tax credit. The law did, however, allow for a lesser “partial allowance” of $.60 per square foot for specific building components that meet certain targets for improved energy efficiency. For purposes of this partial allowance, the three building systems that have been assigned energy savings targets by the IRS and the Department of Energy (DOE) are: (1) interior lighting; (2) HVAC/hot water; and (3) envelope. For the most part, building owners made low-hanging fruit improvements to lighting in order to take advantage of the tax deduction.   

Earlier this year, the IRS modified the tax deduction by lowering the target improvement to allow more HVAC and hot water and envelope improvements to qualify. Building owners who make 15%, (instead of 20%) improvements in the HVAC and hot water energy use can claim the partial $.60 per square foot incentive. Whether these modifications will be part of the tax extenders in 2014 remains in question, but there is an effort to make that happen.

Legislation introduced earlier this year in the Senate would extend and modify the 179D tax credit through 2016. There appears to be wide support to extend 179D this year, with high interest in key changes that would improve the current deduction to better enable it as a meaningful catalyst for existing building “retrofit” projects (and thereby boost construction and manufacturing jobs). 

One potential modification would move toward verified energy savings as the criteria for eligibility. Instead of relying on modeled energy savings, the tax credit would reference measured and verified energy savings over the baseline of that structure’s energy performance prior to the retrofit project. (It has been noted that the internationally renowned, whole-building retrofit project at the Empire State Building would not meet the law’s current targets, even though that project is guaranteed to reduce the building’s energy consumption by about 38 percent.) 

Another fix would make the tax deduction attractive to a broader range of real estate owners.  Many buildings are unable to access 179D because they are owned by entities like real estate investment trusts (REITs) and certain limited liability partnerships (LLPs) that cannot benefit from the CBTD as currently drafted. 

Throughout the past year, key members of Congress have been discussing comprehensive tax reform with a goal of making big changes to our nation’s tax structure and rates. Whether that effort spills over into tax extenders is still unknown. Either way you can probably bet that extending these and dozens of other incentives will likely accompany a lot of debate before it’s passed in late December, or possibly even January. For small business owners, this means less certainty about their potential tax liability going forward and more frustration with Washington.  n