Energy And Small Business Tax Incentives Up For Renewal


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The end of the year is coming and that brings the typical frenzy on Capitol Hill to reauthorize dozens of short term tax incentives that benefit HVACR contractors and their customers.

No one will be surprised to see the 25C residential energy tax credit for eligible home owners to claim up to $150 for a qualified furnace or $350 for a qualified central air conditioner, heat pump, or hot water heater on the list. The 25C tax credit has been extended four times since 2008.

Also set for extinction are the expanded expensing limits under Section 179 and the bonus depreciation allowances for small businesses that invest in new vehicles, equipment, and other improvements. These two incentives have been around for decades and are very popular with the small business community and policy makers.

And the so-called 45L $2,000 new home energy tax credit that home builders claim for using energy efficient appliances in their new homes, including HVAC equipment, is also up for renewal.

When the clock strikes midnight on January 1, 2014, these and 53 other tax incentives will sunset unless Congress takes action. A new one on the list is the Commercial Building Tax Credit, one of the few incentives in the federal tax code designed to get commercial building owners to make energy efficient improvements.

Also known for its place in the tax code, Section 179D was authorized by Congress in 2005. It 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 compared to a “reference building.”

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.

However, the law allowed 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 to the tax deduction.

So, 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 code in 2014 remain in question, but there is an effort to make it happen.

Legislation introduced by Senators Ben Cardin (D-MD) and Dianne Feinstein (D-CA) would extend and modify the 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.

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 buildings energy consumption by about 38%.

Another fi x would make the tax deduction attractive to a broader range of real estate owners. Currently, 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 Section 179D as currently drafted.

Moving to a “verified” energy savings model, or even just a prescriptive based incentive, is a significant shift in tax policy, but one that is trending. For years there have been bills before Congress that would modify the 25C tax credit to make it a performance based credit or even a federal rebate program. Many states already utilize performance based incentives that rely on contractor accreditation, post retrofit quality assurance plans, and actualized energy savings. These extra measures are critical to success, if not because it’s usually public money on the line, but also so energy reduction goals are achieved.

The way Congress has worked in the past; we will probably see these tax incentives extended at the last minute with little or no modifications. And that’s a shame, because there are ways to use the tax code to achieve other policy goals, like reducing energy use or helping small businesses make critical capital investments.

Charlie McCrudden

Posted In: ACCA Now, Government

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