How Does New Tax Law Change Expensing for Energy Efficiency Improvements?

Man installing air conditioning system.

This item is cross-posted with permission from the Clean Energy Business Network.

As of 2018, the costs of certain energy efficiency improvements can now be immediately deducted as business expenses rather than recovered more gradually through depreciation. Learn more about the changes in three questions with industry leaders.

Dan Bresette, Vice President of Policy and Research at the Alliance to Save Energy:

The Tax Cuts and Jobs Act (P.L. 115-409), signed into law December 22, 2017, made significant changes to Sec. 179 that enable some energy efficiency improvements to qualify. Can you walk us through how Sec. 179 expensing works in general, and the specific changes made by the Tax Cuts and Jobs Act?

When a business makes a purchase, it has to make an accounting decision whether to capitalize or expense a cost. There are rules that apply that help guide this decision. And in the case of energy efficiency measures like heating and cooling systems, lighting, and roofing the costs have generally been capitalized and depreciated over a period of time consistent with Generally Accepted Accounting Principles.

But very often the depreciation period was much longer than the expected useful life of the measure, which meant that businesses had to “write off” the undepreciated value. This amounted to a disincentive to make replacements and caused businesses to turn to repairs to keep older, inefficient equipment up and running. When you consider the efficiency improvements that can occur over 30-plus years, this disincentive has prevented businesses from realizing considerable savings. The U.S. Department of Energy sets and regularly updates minimum efficiency standards across more than 60 product categories, which ensure that these savings are “built in” to new equipment that account for about 60% of energy consumption in commercial buildings. Now, businesses can expense the cost of new, efficient measures all at once, which eliminates that disincentive in out-years and encourages the installation of replacements instead of repairs.

Jeff Moe, Director of Global Product Advocacy at Ingersoll Rand’s Center for Energy Efficiency and Sustainability:

How do you expect Ingersoll Rand’s clients to benefit from the new provisions?  Why are these changes so important to energy technology providers?

Historically, HVAC system capital investments have been depreciated over a timeline up to 35 years, depending on a building owner’s specific tax situation. The new tax law now allows HVAC system investments made after December 31, 2017 to be fully expensed (for investments up to $1,000,000/building), which can have a significant impact in first year cashflow and project return on investment (ROI) for the building owner. The impact can change decisions relating to repair-vs-replace or whether an energy retrofit project is a go or no-go (two examples). I anticipate we will see some market growth above business-as-usual. My company is not able to offer tax advice, but we are interested in making our customers aware of the change so they can consult their tax advisors on how to proceed.

Jared Blum, Executive Director of the EPDM Roofing Association:

What types of energy-related improvements to roofs can now utilize Sec. 179 expensing?

The “bonus depreciation” section of the new tax bill finally recognizes the critical need that certain building infrastructure components play and that deserve immediate expensing as opposed to long-term depreciation. The roof is a prime example of that. By reducing the first cost of roof replacement by approximately 28 to 30%, this will incentivize building owners to upgrade their insulation levels and incorporate higher performance roofing systems like vegetative roofs that assist in stormwater runoff, and will add to building resilience and energy efficiency. The new incentive will speed up the payback for high thermal performance investments, a typical factor considered during roof improvements.

Resilient roof design considerations that are now so important in light of predicted climate challenges will be more attainable under the new tax treatment of roofs. This is especially important for the existing building stock.

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Excerpted language from the Tax Cuts and Jobs Act (P.L. 115-409), with key changes italicized:

PART II—SMALL BUSINESS REFORMS

SEC. 13101. MODIFICATIONS OF RULES FOR EXPENSING DEPRECIABLE BUSINESS ASSETS.
(a) INCREASE IN LIMITATION.—
(1) DOLLAR LIMITATION.—Section 179(b)(1) is amended by striking ‘‘$500,000’’ and inserting ‘‘$1,000,000’’.
(2) REDUCTION IN LIMITATION.—Section 179(b)(2) is amended by striking ‘‘$2,000,000’’ and inserting ‘‘$2,500,000’’.
(3) INFLATION ADJUSTMENTS.—
(A) IN GENERAL.—Subparagraph (A) of section 179(b)(6), as amended by section 11002(d), is amended—
(i) by striking ‘‘2015’’ and inserting ‘‘2018’’, and
(ii) in clause (ii), by striking ‘‘calendar year 2014’’ and inserting ‘‘calendar year 2017’’.
(B) SPORT UTILITY VEHICLES.—Section 179(b)(6) is amended—
(i) in subparagraph (A), by striking ‘‘paragraphs (1) and (2)’’ and inserting ‘‘paragraphs (1), (2), and (5)(A)’’, and
(ii) in subparagraph (B), by inserting ‘‘($100 in the case of any increase in the amount under paragraph (5)(A))’’ after ‘‘$10,000’’.
(b) SECTION 179 PROPERTY TO INCLUDE QUALIFIED REAL PROPERTY.—
(1) IN GENERAL.—Subparagraph (B) of section 179(d)(1) is amended to read as follows:
‘‘(B) which is—
‘‘(i) section 1245 property (as defined in section 1245(a)(3)), or
‘‘(ii) at the election of the taxpayer, qualified real property (as defined in subsection (f)), and’’.
(2) QUALIFIED REAL PROPERTY DEFINED.—Subsection (f) of section 179 is amended to read as follows:
‘‘(f) QUALIFIED REAL PROPERTY.—For purposes of this section, the term ‘qualified real property’ means—
‘‘(1) any qualified improvement property described in section 168(e)(6), and
‘‘(2) any of the following improvements to nonresidential real property placed in service after the date such property was first placed in service:
‘‘(A) Roofs.
‘‘(B) Heating, ventilation, and air-conditioning property.

‘‘(C) Fire protection and alarm systems.
‘‘(D) Security systems.’’.
H.R. 1—49
(c) REPEAL OF EXCLUSION FOR CERTAIN PROPERTY.—The last sentence of section 179(d)(1) is amended by inserting ‘‘(other than paragraph (2) thereof)’’ after ‘‘section 50(b)’’.
(d) EFFECTIVE DATE.—The amendments made by this section shall apply to property placed in service in taxable years beginning after December 31, 2017.