A First Read: How the New Tax Bill Complements TX-PACE
How does the new tax bill affect your upcoming energy efficiency project? There may indeed be some positive effects, in the form of bonus depreciation for certain qualified business expenses. New HVAC and roofs were added to this provision.
Specifically, Section 179 raises the cap on deductible business investments to $1mm. 100% of the cost of these qualified items can now be expensed immediately. Previously, these items were typically depreciated over a number of years.
What this means from a cash flow perspective is that depreciation benefits that were previously spread out over many years are now available immediately. From a Net Present Value (NPV) perspective, this immediate boost to cash flow makes an investment in new HVAC and roofs more appealing.
Consider the example of a $1mm HVAC system, previously depreciated straight-line over its 20 year useful life.
Under the old tax scheme, the property owner could expense $50,000 per year ($1mm/20) for 20 years. Assuming a discount rate of 7% and a corporate tax rate of 35%, the NPV of the depreciation expenses come out to just over $198,000 ($17,500 in after-tax cash flow benefits per year for 20 years). Under the new tax scheme, the full $1mm investment can be expensed immediately. Even with a new lower corporate tax rate of 21%, a depreciation expense cash flow of $210,000 is realized immediately.
This new form of bonus deprecation won’t last forever. Instead, it will phase out over time, specifically:
• 100% for any qualifying asset place in service after September 27, 2017 and before December 31, 2022,
• 80% for any asset placed in service in 2023,
• 60% for any asset placed in service in 2024,
• 40% for any asset placed in service in 2025,
• 20% for any asset placed in service in 2026, and
• 0% for any asset placed in service AFTER 2026.
The bottom line: If your business is considering new HVAC or roofs, there just might be some immediate tax implications for you to now take advantage of. TX-PACE offers 100% financing, providing immediate cash flow benefits without having to come out of pocket.
The tax bill did not extend tax credits for combined heat and power (CHP), fuel cells, ground source heat pumps and other energy efficiency technologies. However, Congress is expected to reconsider these tax credits in an extenders bill in early 2018.
