As a business owner, offering the best working environment for your employees is essential. It ensures that workers can work optimally, increasing productivity and profits. Every business should ensure it has a properly functioning HVAC system. It guarantees workers a comfortable workspace that isn’t too hot or cold.
However, like any other machine, HVAC systems need maintenance, which can be costly. This is because it depreciates as years go by, requiring business owners to budget for expensive repairs and replacements.
But not to worry! While a commercial real estate system’s HVAC depreciation life was initially 39 years, things have since changed. You no longer have to wait that long to claim those HVAC repair costs.
Read below to see what this means for you and your business.
Depreciable life of air conditioner
The depreciable life of an air conditioner unit was initially 27 years for residential properties and 39 years for commercial properties. This meant that you had to wait for 39 years to claim the repair expenses incurred during the life of your HVAC system.
However, the introduction of the Tax Cuts and Jobs Act (TCJA), P.L. 115-97 in 2017, allows for the expensing of HVAC costs under section 179 of the Act. This means that business owners can claim any HVAC repair costs even within the first year of a unit’s installation, as long as the expenses are not capitalized.
Now, this law relieves business owners of the burden of having to wait for the former HVAC depreciation life of 39 years to get the tax deduction. It enables them to keep their HVAC systems running to maintain employee comfort and increase productivity.
However, consider a few things before contacting your HVAC technician for repairs.
Which repair costs qualify for a tax deduction?
Tax Cuts and Jobs Act (TCJA), P.L. 115-97 allows HVAC repair and replacement costs to be included as tax deductions during the year they were incurred. This is unlike the previous policy, where a business had to include a fraction of the cost annually over the entire HVAC depreciation life – a whopping 39 years.
However, to qualify for the tax deduction, such expenses must be for non-residential real properties, like hotels, industrial properties, educational or health facilities, etc. Also, the expenses should not fall under capital improvement, which refers to permanent renovations that extend the working life or increase property value.
Replacing the HVAC system
Can you enjoy a tax deduction if you replace your entire commercial HVAC system? Yes! If you plan to replace an HVAC system that has troubled your business for a long time, section 179 of the new law allows you to do that.
This section of the IRS tax code enables business owners to deduct the cost of qualified HVAC equipment, whether bought in cash or financed, during the same tax year. This means that if a business owner buys or leases a component of a qualifying HVAC system, they can enjoy a tax deduction of the item’s full price the same year.
It is essentially part of a US government incentive, encouraging small to medium businesses to invest in future growth. It relieves businesses of the tax liability, allowing them to channel that money back toward growing their business.
Before this law, businesses still deducted qualifying purchases for HVAC systems; however, things were slightly different. Businesses would deduct a fraction of the whole purchase cost every year through depreciation.
For instance, if you spent $50,000 on equipment, you were allowed to deduct around $10,000 each year for the next five years through depreciation. The new law removes this restriction. Now, businesses can deduct the entire amount even during the first year of purchase.
What is the deduction limit?
While most HVAC costs will qualify for a tax deduction, you also need to know the limits to these HVAC depreciation deductions. For example, how much money can you deduct, and how much are you not allowed to deduct?
There are some limits on the deductible amount and the type of equipment that qualifies. In 2022, the purchase cap was set at $1,080,000, meaning you could deduct the entire purchase price if it fell below this amount. This was a $30,000 increase from the 2021 cap amount.
There is also a limit to how much you can spend on your purchase. The total purchase cost is set at $2,700,000. If your expenditure exceeds $2,700,000, your deduction will be reduced by a dollar for every dollar it goes over. It will end entirely after your purchase hits $3,670,000.
Which businesses qualify for the section 179 tax deduction?
Any business that buys or leases new or used equipment qualifies for the tax deduction under section 179. That’s assuming its spending falls below $3,670,00.
Qualifying purchases include equipment like HVAC systems, generators, and water heaters. Also, qualifying equipment should be purchased between the 1st of January and the 31st of December of the same year. To be sure that the equipment you want to buy qualifies for the deduction, you can always contact a reliable HVAC contractor for advice.
AC unit depreciation life
The average useful life of an AC unit is between 15 and 20 years. However, with proper maintenance, your air conditioner system can last beyond that.
When it’s part of your HVAC system, an AC unit’s depreciation life is usually set at 27.5 years. If it’s a stand-alone unit, the depreciation life decreases to around seven years. Systems in commercial real estate can be depreciated for up to 39 years.
The depreciation of HVAC systems is something that business owners should always be keen on. Understanding the regulations governing the tax deduction under section 179 is an excellent way to ensure your business saves money and gets the most out of its HVAC system.
Before you make any HVAC repairs or replacements, check to see if they will be eligible for tax deductions. This will not only ensure a comfortable working space for your staff but also help to make sure it’s affordable for the company as a whole.
If you have a question about your current HVAC system or are interested in purchasing a new one, contact us, and one of our HVAC professionals will gladly assist you.