For the shrewd business owner, a new commercial HVAC system and other energy efficiency upgrades can be a profitable investment both through tax incentives and reduced energy bills. These incentives can help cover the initial cost of upgrading, and also can help recoup the cost over a shorter period of time. Below, we highlight some of the primary tax incentives for commercial energy efficiency upgrades.
The Energy Policy Act of 2005 (EPACT) offers tax deductions to offset the cost of improving the energy efficiency of commercial buildings. This act was later extended in the Emergency Economic Stabilization Act of 2008, allowing new systems put into place as late as December 31, 2020 to qualify. Known as the Section 179D deduction, this incentive only applies to buildings that meet ASHRAE (American Society of Heating, Refrigerating, and Air-Conditioning Engineers) Standard 90.1, specifically 90.1-2001 for buildings in use before 2016, and 90.1-2007 for buildings in use before 2017.
To qualify for this deduction, the commercial HVAC replacement must meet certain minimum savings criteria. IRS Notice 2006-52 had an effective date of 1/1/06-12/31/08, and required that the new system put into use during this time frame must reduce the building’s energy consumption by 16.7% over the minimum ASHRAE standards. IRS Notice 2008-40 had an effective date of 1/1/2006-12/31/13 and required a 20% reduction in energy consumption over the ASHRAE standards. IRS Notice 2012-26 has an effective date of 3/12/12-12/31/20 and requires that the new energy efficient HVAC system only improve the building’s energy consumption by 15% over the minimum ASHRAE standards. Systems installed beyond 2020 may qualify under future extensions of this particular mandate.
Note that the deduction refers to energy use, not energy cost, so your new commercial heating and/or new commercial cooling system’s ability to meet the minimum requirement for this deduction is independent of fluctuations in energy prices. Whether or not your system meets this requirement is also independent of your use of that system in any given year, so your pre- and post-installation energy consumption does not impact your ability to qualify. Instead, you can find IRS-approved software on energy.gov that will enable you to model your new system and see if it qualifies. If you do meet this criteria, your new energy efficient HVAC system can earn you a deduction of up to $0.60 per square foot.
The 179D deductions are not limited to new commercial HVAC appliances. Improvements to your building’s energy envelope and lighting can also earn you this deduction. Similar to that of a new energy efficient HVAC system, these other improvements must meet minimum savings requirements against ASHRAE standards.
Energy efficient improvements to the building’s envelope (the insulation, walls, doors, windows, and roof) can earn an additional $0.60 per square foot tax deduction. As with the HVAC deductions, the required improvement depends on the IRS Notice. For IRS Notice 2006-52, the new envelope must reduce energy use by 16.7% over the minimum ASHRAE standards. For IRS Notice 2008-40 and IRS Notice 2012-26, only a 10% energy savings is required.
Improved lighting systems can also earn you a $0.60 per square foot tax deduction under 179D, and through a similar criteria based on the applicable IRS Notice. For IRS Notice 2006-52, lighting improvements must result in a 16.7% energy savings. For IRS Notice 2008-40, a 20% energy savings is required, and for IRS Notice 2012-26, a 25% energy savings is required. This deduction is prorated depending on the reduction in Lighting Power Density.
Note that none of these are mutually exclusive, which means making improvements to all three parts of your building can result in a $1.80 per square foot tax deduction. For all of these improvements, use an IRS-qualified software to determine whether or not your project will qualify for the tax deduction.
For a commercial HVAC replacement that will give you a tax credit in addition to a deduction, consider a heat pump system, like those offered by Meyer Heating and Air. A heat pump uses geothermal energy to heat a building in the winter and then uses the earth as a heatsink to cool the building during the summer.
As a renewable energy system, heat pumps qualify for the federal business energy investment tax credit. This credit was expanded by the Energy Improvement and Extension Act of 2008 and the American Recovery and Reinvestment Act of 2009. The Bipartisan Budget Act of 2018 further expanded this tax credit and extended it to projects whose construction begins by 12/31/2022 (with no construction completion deadlines). This amounts to a 10% investment tax credit on the spending of the heat pump with no maximum limit. Should this 10% credit exceed your regular income and alternative minimum tax liability, it can be carried forward for future years. In addition to this tax credit, eligible energy properties qualify for a 100% first year special depreciation allowance.
In addition to improving the comfort of your building, monthly energy costs, and business reputation, energy efficient upgrades to your commercial building can offer significant tax benefits. If you are in the greater St. Louis area, choose Meyer Heating and Air for your energy efficient commercial HVAC replacement. If you need a furnace replacement, call us at (314) 279-0806 or click here to request an appointment for a new commercial heating system that will meet your energy efficiency needs.
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