Tax Cuts and Jobs Act: An Opportunity for the Industry
The Air-Conditioning, Heating, and Refrigeration Institute (AHRI), the trade association representing HVACR and water heating manufacturers, applauded passage of the Tax Cuts and Jobs Act at the end of last year. AHRI’s manufacturers strongly supported Congress’s efforts to simplify the tax code and reduce rates, and particularly welcomed the inclusion of 100% bonus depreciation for business purchases of HVACR equipment, a permanent reduction in the corporate rate to 21%, a reduced rate for pass-through entities, repeal of the corporate alternative minimum tax, increased Section 179 expensing for small businesses, and the doubling of the estate tax exemption—all of which will serve to make the U.S. a more competitive place to do business.
AHRI believes these provisions are all crucial to the continued growth of manufacturing in the United States and will allow the HVACR industry and others to continue to innovate and create jobs. Tax policy at all levels plays a critical role in the ability of our members to thrive in the United States and effectively compete in a global economy. AHRI advocates for tax policies that do not place an additional burden on manufacturers, and instead promote economic growth through job creation.
This legislation goes a long way toward meeting AHRI’s goals with respect to reforming the tax code. For more than 10 years, AHRI has sought realistic treatment in the tax code for commercial HVACR and water heating equipment, which currently is allowed to be depreciated only at the default rate of 39 years. This has, for far too long, discouraged businesses from replacing their older, less efficient equipment because it is not fully depreciated. This new bill includes 100% bonus depreciation for property acquired between September 28, 2017, and December 31, 2022, which should result in a significant upgrade to the U.S. installed base of commercial HVACR equipment. Thereafter, the bonus depreciation percentage decreases by 20 points per year, phasing out entirely by 2027. The bill extends eligibility for bonus depreciation to used property as well.
While the House version of the bill resumed favorable tax treatment for geothermal equipment, that was not included in the final bill, as Congress intends to consider that in a tax extenders package to be taken up later.
Below is a detailed breakdown of Tax Cuts and Jobs Act provisions relevant to the HVACR industry:
- A corporate tax rate of 21%, beginning in 2018.
- A pass-through deduction of 20%.
- Immediate expensing of commercial HVAC property, with Section 179 limits doubled from $500k to $1 million per item. The phase-out also increases from $1 million to $2.5 million per year. This provision does not expire. Of deep concern to AHRI, the final bill utilized none of the House provisions that would have explicitly included boilers and water heaters, as well as utilizing ASHRAE 90.1 to define the applicable equipment. AHRI and its members will work either with Congress, if it considers an “errors” package to amend the passed bill, or with the IRS to make sure the definition of “heating, ventilation and air-conditioning equipment” covers boilers and water heaters in its regulations.
- An increased bonus depreciation for qualified property acquired between September 28, 2017 and December 31, 2022 from 50% to 100%. Thereafter, the bonus depreciation decreases 20% per year, phasing out entirely by 2027. Property eligible for bonus depreciation does not need to be new.
- The Alternative Minimum Tax for corporations was scrapped in the final bill, allowing for things such as the retained R&D tax credit to continue to have value.
- The bill changes the treatment of deductible research and experimental costs (R&D), beginning January 1, 2022, after which they must be amortized over five years.
- For territorial taxes, the conference went with the Senate’s Base Erosion Anti-Abuse Tax (BEAT) tax over the House Excise Tax.
- Repatriation provisions ended up at a 15.5% rate for cash and 8% rate for earnings reinvested in hard assets, with an 8-year window to pay the tax.