A change in the tax law at the end of 2017 is a game-changer providing great economic benefit for replacements of HVAC equipment in 2020. Section 179 of the tax code now allows a tax deduction for 100% of the installation costs for HVAC replacements. This article shows you how you can use the change in the tax law to close more projects in 2020 by explaining:
- why Section 179 substantially enhances project economics;
- when Section 179 applies to HVAC replacements; and
- how to share this information with your customers and prospects.
In order for this to grow your project business, you must be proactive in making your customers and prospects aware of how they can benefit from Section 179 . They will embrace this information and it could cause them to act now on projects they’ve been delaying. Remember, tax laws change every year and it would be a shame if they lose these benefits by delaying projects into 2021.
“Make sure it is you – not your competitors – who is telling customers and prospects about the benefits of Section 179.”
Before we get started:
- Don’t worry – you do not have to be a tax expert. We keep it simple.
- Kudos if you are already pitching Section 179 benefits in your selling efforts today because many of your competitors are not.
- If you are not pitching this today, some of your competitors are and this is the time to catch up.
Why Companies Benefit from Section 179
The first step is to understand the basic math as to how the deduction can be calculated as a benefit in dollars. Let’s use an example assuming your customer replaces HVAC equipment for a total installation cost of $100,000. Let’s assume they can expense 100% of the total installation cost of $100,000. Assume they are a corporation which would place them in the 21% tax bracket enabling them to save $21,000 on their tax bill. On an after-tax basis, the real cost of the retrofit is reduced to $79,000!
“A 5-year payback project has a real payback of 4 years due to the 2020 tax benefits. Share an example with your customer or prospect.”
Here is an example of how the payback period is is reduced from 5 to 4 years assuming a chiller replacement for a corporation:
- Total installed cost of $300,000
- Annual energy and maintenance savings of $60,000
- Simple payback of 5 years (300,000/60,000) as traditionally calculated
Due to the change to Section 179, the real cost of the project is $237,000:
- 300,000 X .21 = 63,000 (tax savings)
- 300,000 – 63,000 = 237,000 (the real cost of the project)
- 237,000/60,000 (annual savings from above) = 3.95 years payback
When Section 179 Applies for HVAC Replacements
What is “HVAC?” It is clear the new law applies to HVAC replacements but the IRS failed to define exactly what falls under the definition. Equipment that is clearly HVAC is included, but there is less certainty with other types of equipment. Based on conversations with tax attorneys:
- control systems could qualify provided their primary purpose is to control HVAC equipment, as opposed to those whose primary purpose is to control lighting, and
- lighting upgrades apparently do not qualify – they were allowed if installed by December 31, 2017 through Section 179D, but lighting was not specifically mentioned in the Tax Cuts and Jobs Act for 2017.
Existing buildings only: the changes to Section 179 apply only to equipment replacements in existing buildings – it is not available for new construction.
“Your customer or prospect must rely on their counsel as to whether the project and their entity qualifies for benefits under Section 179.”
Other eligible equipment: in addition to HVAC, your project might include rooftops and systems related to fire protection, alarms and security. This equipment is also eligible for the 100% deduction under Section 179.
Section 179 applies to corporations: owners of partnerships and LLC’s (Ltd, LLP or LLC at the end of their names) can benefits in other ways. See the end of this article for more.
Your customers and prospects must work with their tax counsel in determining if they can benefit from the new tax laws. They certainly have an incentive.
How to Share Section 179 Information with Customers and Prospects
Customers: start with the low hanging fruit – those who have already acknowledged the need to do replace their equipment. This is a great incentive for them to move now! If they delay beyond 2020, they run the risk the tax laws might change in 2021. For all other customers, let them know about the changes to Section 179. It increases the odds of uncovering an opportunity and in any event, they will appreciate your efforts.
Imagine how bad it would feel if one of your competitors is the first to share this information with your customer. You don’t want to be in this position – make sure it comes from you. In addition, be first with your competitors’ customers. See below.
Prospects: let’s say they are one of the many who are unaware of the changes to Section 179 and you are the first to let them know about it. At a minimum, you will get a big check mark. Now think about your prospect calling their existing service provider. “Why haven’t you told me this?” Your competitor is left in the nasty position of having to explain: 1) they weren’t aware of the tax change, or, 2) they were aware of it, but had not shared it. Neither is a good answer!
“Let your customers and prospects know about the benefits of Section 179. Make sure you are the one sharing this information.”
Methods to reach Customers/Prospects: in person is always best, but meetings are not always practical. If that’s the case, reach out to a number of customers and prospects through emails explaining the benefits of Section 179. EnFlux can make it easy for you. Go to this page of the EnFlux Building Solutions website and scroll down to the bottom of the page. Download the Section 179 handout and attach it to an email. It’s that simple!
Point Customers and Prospects in the Right Direction
Due to our complex tax laws, the devil is in the details as to how your customer can benefit from Section 179. That’s OK – you’re not expected to know all of this. When introducing the tax change, direct your corporate customers/prospects to this link: The Tax Cuts and Jobs Act of December 22, 2017 for the details.
If your customer is a partnership or LLC, the tax benefits likely flow through to the owners of the business (“flow through entities”). In that case, do not go through the mathematical examples above since the tax benefit is quite different and much more difficult to calculate. Instead introduce them to the benefits of Section 199a for flow through entities so they can explore with their tax counsel.
“You’re not expected to be the expert. But it’s easy to show your customers and prospects where to find the facts.”
Section 179 and Section 199a have been covered in various industry publications but as a precaution, you should not direct customers/prospects to those articles. Some are simply incorrect. The links above take them directly to information provided by the IRS.
Hopefully, this article can boost your project sales for 2020. At a minimum, introducing the changes to Section 179 will be appreciated by your customers and prospects. Please do not hesitate to contact me at lderrett@enfluxbuildingsolutions or call 713.714.0575 if you have questions. Good luck.
Please note EnFlux Building Solutions does not provide tax advice and your customer should check with tax counsel as to the benefits from the change in tax law from the Tax Cuts and Jobs Act of December 22, 2017.
About the author: Larry Derrett is the founder and CEO of EnFlux Building Solutions, which provides contractors with access to financing, energy solutions, and online sales tools to help them win more business. Larry brings a unique perspective to financial selling having sat on both sides of the desk as a banker and a CFO. In addition, he has a very strong background in developing financial selling techniques for clean energy projects ranging from a simple $10,000 change out to projects for hundreds of millions of dollars for Fortune 500 companies. For three years, he led the financial structuring group at Enron Energy Services working solely on the origination side of the business helping clients understand the importance of allocating capital to energy efficiency projects. Upon the demise of Enron, he formed HVAC Capital Corp whose clients included large mechanical contractors with a national footprint. HVAC Capital provided a finance program that contractors could access to offer financing to their customers for replacement projects. During this time, Mr. Derrett trained hundreds of sales reps at mechanical contractors on the finer points of incorporating financial selling into their sales process.