HVAC Tax Credits: A Guide for Contractors
The Internal Revenue Service (IRS), in efforts to promote energy efficiency, has offered a number of tax incentives for clients purchasing and installing qualifying HVAC equipment. Contractors typically field questions regarding these tax incentives because they relate to the products sold. Below you’ll find information which will help you educate your clients and guide them when making purchase decisions considering the possible tax incentives they may access.
Tax Credits vs. Tax Deductions
Many people use the terms “tax credit” and “tax deduction” interchangeably, though they are quite different. Both will reduce income tax liability, but in different respects.
- Tax credits offer a dollar-for-dollar reduction in the amount of taxes one owes. Let’s say your tax bill comes to $3,000 and you have a tax credit that equals $1,000 – using the tax credit, your tax bill is reduced by $1,000 to a total of $2,000.
- Tax deductions reduce your taxable income by a percentage dictated by your marginal tax bracket. Say you have a $1,000 deduction and are in the 15% tax bracket – the tax deduction would reduce your taxable income by $150.
The tax incentives for purchasing and installing qualifying HVAC equipment are tax credits. Qualified homeowners may reduce their tax bill up to a certain percentage when purchasing and installing eligible products.
Residential HVAC Tax Credits
The following tax credits are applicable to qualifying systems installed by December 31, 2016. Many of the tax credits set to expire were extended by the President in December 2015.
Geothermal Tax Credits
Tax code section 25D covers tax credits for qualified geothermal system expenses. This credit applies to homes in the United States which are used by the taxpayer as a place of residence. Under this credit, 30 percent of the total system investment can be claimed as a tax credit. Expenses which can be considered toward the total investment include:
- Labor costs toward preparing the site
- Assembly or installing the original system
- Piping and wiring which connects the system with the home
To qualify, the heat pump purchased must meet the ENERGY STAR criteria in place at the time of expenditure. Current ENERGY STAR program requirements can be found here. The credit also includes heating only and cooling only equipment.
- There is no upper limit on the amount which can be claimed under this tax credit.
- This credit can be taken for new construction and existing homes.
- This credit can be taken for principal residences as well as second homes. Systems installed in rental properties do not qualify for the tax credit.
Efficiency Tax Credits
Section 25C of the tax code covers tax credits for installing qualified heating and cooling systems. This credit applies to systems purchased and installed in 2016, or can be applied to those installed from January 1, 2015 to December 31, 2015 for the 2015 tax year.
These tax credits have been offered since 2006, and have been capped at $500. If a taxpayer has previously claimed 25C tax credits of $500 or more, they will not be eligible to receive additional credits despite installing qualified equipment.
- Residential Central Air Conditioners: Split systems must have an EER greater than 13 and SEER greater than 16; packaged systems must have an EER greater than 12 and SEER greater than 14. The tax credit for purchasing and installing qualified residential central air conditioning equipment is $300.
- Residential Air Source Heat Pumps: Split systems must have an HSPF of greater than 8.5. an EER greater than 12.5, and a SEER greater than 15; packaged systems must have an HSPF greater than 8, an EER greater than 12, and a SEER greater than 14. The tax credit for purchasing and installing qualifying residential air source heat pumps is $300.
- Residential Propane, Gas, or Oil Furnace or Water Boiler: Gas, oil and propane furnaces and boilers must have an AFUE greater than 95%. The tax credit for purchasing and installing qualifying boilers and furnaces is $150.
- Advanced Main Circulation Fan: The fan’s energy use cannot be more than 2% of the furnace’s total energy use. If the fan qualifies for the credit but the furnace does not, consult IRS guidance to determine eligibility. The tax credit for purchasing and installing qualified main air circulation fans is $50.
- Residential Propane, Gas, or Oil Water Heaters: To qualify, water heaters must have an energy factor greater than 0.82 or a thermal efficiency greater than 0.90. The tax credit for purchasing and installing qualifying propane, gas, or oil water heaters is $300.
- Residential Electric Heat Pump Water Heaters: To qualify, water heaters must have an energy factor greater than 2.0. The tax credit for purchasing and installing qualifying residential electric heat pump water heaters is $300.
To obtain the appropriate tax credits, your clients will need to have certain information available when preparing their taxes. IRS Form 5695 will be used to claim the credits.
- Clients should save all manufacturer certifications and receipts from their HVAC contractor in case they are needed by the tax preparer or in the event of an audit.
Commercial HVAC Tax Deductions
Owners of commercial buildings may be able to claim tax deductions when they take measures to improve the efficiency of their buildings or essential systems.
- For new and existing commercial buildings, if the building saves a minimum of 50 percent of its heating and cooling energy while meeting ASHRAE standard 90.1-2001 for the 2015 tax year, or ASHRAE Standard 90.1-2007 for the 2016 tax year, the building owner may be eligible for a tax deduction up to $1.80 per square foot of the building.
- When taking measures which affect either the building envelope, heating and cooling systems, or lighting systems, partial tax deductions up to $0.60 per square foot may be taken for systems that are placed in service from January 1, 2015 to December 31, 2016.
Additional Money-Saving Incentives
Tax incentives aren’t the only financial incentives your clients can access when installing energy efficient heating and cooling equipment. There are various state ran programs which may offer reimbursement as well as programs offered by utility providers. Each program will have their own requirements, and may require homeowners to work with an approved HVAC contractor to be eligible; it may be worth your while to investigate these local programs to see how your business can participate.
To find programs which may be applicable to your clients, visit Energy.gov.
Consult the Pros
Contractors are not accountants, after all. Though it’s our products which may qualify for tax credits, we’re not able to advise regarding a client’s eligibility to receive such credits. It is always best that you also inform your clients to discuss whether or not their purchase will qualify them to receive tax credits with their trusted tax professional.
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