The CARES Act clarified a drafting error in the
Tax Cuts and Jobs Act of 2017 and now allows the
cost of Qualified Improvement Property (including
HVAC and lighting retrofits) to be expensed 100%.
The change is retroactive to 2018 – 2019.
As a result, the after-tax benefit of most energy efficiency retrofits has changed dramatically.
Qualifying Improvement Property (to interior of the building) is now eligible for bonus depreciation allowing total installed costs to be expensed at 100%. Examples include mechanical and electrical equipment, fire protection/security systems, plumbing, drywall, ceilings, and doors. Exclusions are: structural framework, enlargements to the building, elevators, escalators, and rooftops (including RTU’s).
This can dramatically change the after-tax benefit of a HVAC change-out. Below is a simple example of a $300,000 chiller replacement project. Note how the after-tax simple payback improves from 5 to 4 years. At the 21% tax bracket, the after-tax cost of a $300,000 chiller replacement for a corporation would be $237,000 (300,000 X .21 = 63,000 in tax savings; 300,000 – 63,000 = 237,000, the real cost of the project)
The example is for a corporation, however, owners of flow-through tax entities such as LLC’s and LP’s can benefit depending on their tax position. Also, as opposed to using bonus depreciation, owners may opt for Section 179 (TCJA of 9/17/2017) to expense certain retrofits (such as RTU’s), up to $1 million.