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The CARES Act and TCJA Can Make HVAC Retrofits Eligible for 100% Deduction and Bonus Depreciation.

At a time when improved indoor air quality is more important than ever to reopen schools and business safely, tax incentives make this an excellent time to invest in new HVAC equipment. That’s due to the recent Coronavirus Aid, Relief and Economic Stability (CARES) Act, as well as extensions for the 2020 tax year to Section 179 of the 2017 Tax Cuts and Jobs Act (TCJA).

The 2020 extension of the Section 179 tax deduction in the 2017 TCJA means that businesses can take a 100% deduction for up to $1,040,000 million in qualifying nonresidential HVAC equipment purchases for the 2020 tax year. This helps building owners justify replacement HVAC costs vs. repair costs.

As background: In 2017, TCJA changed the rules on bonus depreciation – a tax incentive that allows businesses to deduct a large portion of an asset’s upfront costs, rather than write them off over the asset’s useful life. Under the TCJA, several existing property classifications were removed and consolidated under a single classification – “Qualified Improvement Property” (QIP). Within the Act, QIP was rendered ineligible for bonus depreciation.

The new CARES Act corrects this glitch in the TCJA, which failed to designate a depreciation recovery period for QIP. As a result, by default QIP was subject to a 39-year recovery period like other nonresidential real property. Furthermore, while QIP was entitled to immediate expensing under section 179 (subject to that section’s dollar limitations), it was not eligible for bonus depreciation because bonus depreciation is only available for property with a recovery period of 20 years or less. The CARES Act provides that QIP now has a recovery period of 15 years, thus making it eligible for bonus depreciation. This technical correction is effective retroactively to taxable years beginning in or after 2018.

All this means that now is a great time for building owners to save money when making new HVAC purchase…which is more important than ever now that those purchases can provide cleaner, safer indoor air for the building’s occupants. Building owners should always consult their tax professional about their specific situation, but HVAC sales personnel and contractors should be prepared to inform their customers about the tax advantages available now.