Will Tax Code Reform Help Or Hurt HVACR Incentives?
The U.S. tax code is so confusing that most Americans automatically assume they are paying more than they should because they’ve missed some key deductions. Or they think they’ve made an improper claim that might get them in trouble with the IRS.
The complexity of the tax code, the stories about large corporations paying next to nothing, and the amount individuals pay frustrates a lot of taxpayers. And that leads to frequents calls for reforming the tax code, something Congress has not been able to accomplish in more than 30 years.
The tax code can be used as a tool to affect behavior in positive ways. The federal government allows individuals to claim an income tax deduction based on mortgage interest, because it encourages millions of Americans to pursue the dream of home ownership and supports the enormous housing industry. But giving this tax break costs the federal government about $70 billion a year in lost revenues. This is one example of thousands of instances where Congress has used the tax code under the pretext of economic growth or stimulus.
For the first time in awhile Congress is taking a serious stab at tax code reform, but the results are not off to great start.
There are two ways to tackle tax reform: pick the code apart piece by piece or scrap the whole thing and build it back up from scratch. Picking it apart is the best way to deal with all the archaic loopholes and tax breaks that make headlines like “Fortune 500 Company Pays No Taxes.” But this approach doesn’t untangle the code or address the root cause of the frustration.
Over the last two years, Congress’s primary tax panel, the House Ways and Means Committee, has been working on a proposal to overhaul the tax code proposing to get rid of everything and start over. After more than 30 hearings, 11 bipartisan working groups, three discussion drafts, and more than 14,000 comments over the last year, a draft version of the Tax Reform Act of 2014 was released in February.
And while this strategy may appeal to populists, it does have its drawbacks.
The Tax Reform Act of 2014 upends the entire tax code. One of the most positive changes would simplify the code to two income brackets (10% and 25%) and increase the standard deduction for individuals. That’s the big first step towards simplicity.
The proposal also would make the code fairer by lowering the rates for small businesses to a maximum 25% rate, expand the use of cash accounting, and simplify the rules of S corps. Thousands of small business HVACR contractors are organized as pass through entities like S Corps and this change would be a welcome relief from higher tax rates.
But the plan would also repeal or dramatically cut many popular tax incentives that are used by individuals, small businesses, and big businesses. That mortgage interest deduction I mentioned earlier would get the boot.
Many of the tax incentives that benefit HVACR contractors or their customers were also put on the chopping block. The 25C residential energy tax credit that homeowners can use to offset the cost of highly efficient HVAC or hot water appliances would be gone. To be fair, this tax credit has expired at the end of 2013 when the Ways and Means Committee was finalizing the Tax Reform Act of 2014.
Significantly, the 25D renewable energy tax credit for purchasing a geothermal heat pump system, along with solar, fuel cell, or wind systems would also be abolished, even though it is authorized through 2016. This would be a particularly devastating blow since the manufacturers in these industries are operating under the premise that the tax credit will be around for another two and a half years.
One welcome addition to the tax code in the Tax Reform Act of 2014 would allow a small business owner the ability to expense up to $250,000 for the purchase of commercial HVAC equipment (but not other real estate improvements) in the year it is placed into service.
For years, ACCA and other organizations have argued for accelerated depreciation schedule for commercial HVAC equipment over the current 39 years. Indeed, the expected life span of a properly installed and maintained system is about 20-25 years.
Allowing building owners to expense a new chiller or other major HVAC investment (instead of using depreciation) would certainly increase interest in new higher efficiency systems. There is a lot of pent up demand for energy saving equipment when more than half of a building’s energy use is tied to the HVAC system.
Tax reform is controversial at any time, because there will always be losers. That’s especially true in an election year. Even if the Tax Reform Act of 2014 gains no traction, the HVACR industry has to look very carefully at what is included in the proposal because any one part could be cherry picked for future legislation when Congress is looking for a revenue raiser.
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