Upgrading your building’s HVAC system can make a lot of financial sense in the long term, but the short-term sticker price of an upgrade can present significant hurdles to making your climate control system more energy-efficient and cost-effective in the long term. Reduced energy consumption and lower maintenance costs can provide a return on your investment within three to seven years, but that can be a long time for a business to wait.
Fortunately, that’s why business HVAC tax credits exist. Through state and federal tax credits, business owners can keep more of their money that would otherwise go to taxes and use it to offset the upfront costs of upgrading their HVAC systems with modern, energy-efficient equipment. In one of our previous blogs, we took a look at commercial HVAC tax credits on the state level here in Colorado—in this blog, we’ll turn our eye to the federal government.
Read on to explore various federal energy credits and learn how your business can benefit from them, what makes you eligible, and how to claim them.
A Look At Business Energy Tax Credits On the Federal Level
One of the major federal commercial energy tax credits you can use to cover the upfront costs of HVAC equipment upgrades is IRS Section 179D: the Energy Efficient Commercial Buildings deduction.
This program, created by the 2022 Inflation Reduction Act, allows the owners of qualified commercial buildings and designers of government-owned buildings to deduct the cost of energy-efficient improvements, including HVAC systems. Deduction amounts can be anywhere from $0.50 to $5.00 per square foot, depending on the energy savings achieved.
To qualify, your building must be a commercial or government-owned property, and your upgrade must achieve a 50% reduction in energy and power costs compared to a reference building (based on ASHRAE standards). However, partial deductions are available for qualifying upgrades to HVAC, lighting, or building envelope, even if the 50% threshold isn’t reached.
To claim the Energy Efficient Commercial Buildings tax deduction, you will need to obtain an IRC 179D Study performed by a qualified third-party engineer or contractor assessing the energy-efficiency improvements of your HVAC system and deduct through IRS Form 7205 (Energy Efficient Commercial Buildings Deduction) with your business tax return.
In addition, the Clean Electricity Investment Credit, which replaced the Energy Investment Tax Credit upon its phasing-out at the end of 2024, may cover HVAC upgrades made to your property if those upgrades involve incorporating certain clean electricity technologies into a qualified facility.
While HVAC equipment isn’t covered in and of itself, if your upgraded HVAC system has qualified renewable technologies (such as geothermal or solar energy storage technology) integrated into the system, your building may be eligible. If so, your business energy tax credit could be up to 30% of the cost for eligible renewable energy property through at least 2032.
To claim, you will need to file IRS Form 3468 and file it with your annual return for the first taxable year in which you reported a clean energy investment credit.
Can the Modified Accelerated Cost Recovery System (MACRS) help offset the cost of an energy-efficient HVAC upgrade?
While not a federal business HVAC tax credit—or a tax credit at all—MACRS has helped businesses maximize the effectiveness of commercial energy tax credits. This system allows businesses to make annual depreciation deductions that help businesses recover the capitalized cost of certain assets over time. Depreciation includes wear and tear, deterioration, or obsolescence.
Businesses investing in solar energy technology have already used MACRS to great effect to recover costs from qualifying solar energy equipment. Qualifying solar energy property, as well as wind energy property, fuel cells, and other renewable energy technologies generally qualify for a 5-year cost recovery period under MACRS.
HVAC systems in commercial buildings have a tax life of 39 years, meaning you can use MACRS to claim depreciation on your taxes for their entire tax life. Section 179 of the Internal Revenue Code also includes commercial HVAC under the Tax Cuts and Jobs Act of 2017. Section 179 allows businesses to write off the entire purchase price of qualifying equipment for the current tax year, up to $1,050,000.
Using MACRS alongside the Energy Efficient Commercial Buildings tax deduction or Clean Electricity Investment Credit can minimize your taxable income and maximize your deductions’ effectiveness in lowering your tax liability.
Are federal energy efficiency programs and tax credits on the chopping block?
The status of federal energy tax credits for businesses is, unfortunately, uncertain at the moment. A House of Representatives bill puts green-energy incentives at risk, despite both consumer and business energy tax credits enjoying widespread bipartisan support. In addition, Congress’s FY 2025 budget reconciliation bill may require businesses to file IRS Form 990-T if they claimed direct pay energy credits under 2022’s Inflation Reduction Act or else forfeit credit eligibility.
Over 270 businesses and trade associations have urged Congress to protect federal energy tax credits. However, it’s not clear yet how tax credits for commercial HVAC upgrades such as IRS Section 179D will be affected, or if there will be a sunset period for removed tax credits.
Likewise, the Energy Star program, a long-lived, massively successful, and widely beloved consumer program to certify environmentally friendly appliances such as commercial HVAC systems, is reportedly at risk of being shut down amid a massive reorganization of the EPA. Energy Star also hosts information on business energy tax credits like the Energy Efficient Commercial Buildings Deduction. The loss of this program could make it harder for businesses to confidently choose energy-efficient HVAC equipment and develop strategies to maximize the effectiveness of energy tax credits.
This news might sound bleak for business owners hoping to take advantage of tax deductions to defray the costs of a recent HVAC upgrade. But if there’s any message you should take away from this, it’s that 2025 could be your last best chance to reap the benefits federal energy tax credits have provided businesses.
Also, keep in mind that even if certain federal tax credits are done away with, there will still be state and local green energy incentives you can take advantage of to make upgrades and retrofits to your HVAC system more cost-effective.
Chiller Systems Service: Energy-Efficient Commercial HVAC Solutions
Chiller Systems Service has helped customers across the Colorado Front Range find cost-effective, turnkey solutions to bring energy efficiency and cost savings into their commercial HVAC systems. As an award-winning Xcel Energy Efficiency Partner, we can help you take advantage of tax credits for commercial HVAC upgrades. Reach out to us today to start the conversation: Contact us today