Does HVAC Qualify for Bonus Depreciation?
Considering new HVAC for your business? See if it qualifies for bonus depreciation and learn how this tax incentive can reduce your taxable income.
Bonus depreciation is a tax incentive designed to encourage business investment by allowing companies to deduct a significant portion, or sometimes the entire cost, of eligible assets in the year they are placed in service. This accelerated deduction reduces a business’s taxable income, improving cash flow and providing a financial boost for new acquisitions. Generally, Heating, Ventilation, and Air Conditioning (HVAC) systems can qualify for bonus depreciation, provided they meet specific criteria. This tax provision aims to stimulate economic activity by making capital expenditures more financially attractive for businesses.
Understanding Bonus Depreciation Eligibility
Bonus depreciation is an accelerated depreciation method, allowing businesses to deduct a large percentage of an asset’s cost immediately rather than spreading it over its useful life. This provision applies to certain types of property, including new or used tangible personal property, qualified improvement property, and specific other assets. To be eligible, the property must be acquired and placed in service within designated timeframes.
The asset must be used in a trade or business and have a depreciable life of 20 years or less. Additionally, the property cannot be acquired from a related party. The percentage of bonus depreciation has varied over time. While it phased down from 100% in prior years, recent legislation permanently restored 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025.
Qualifying HVAC Systems for Bonus Depreciation
HVAC systems can qualify for bonus depreciation when they meet the definition of “qualified improvement property.” This category includes interior improvements to nonresidential real property, provided these improvements are placed in service after the building was initially placed in service. The HVAC system must serve a trade or business purpose, such as for a commercial building or business office, and not for a personal residence.
The Tax Cuts and Jobs Act (TCJA) of 2017 clarified the eligibility of qualified improvement property for bonus depreciation. While the TCJA initially included a drafting error, the CARES Act later corrected this, retroactively assigning a 15-year recovery period to qualified improvement property, making it eligible for bonus depreciation.
New installations or significant upgrades that constitute capital improvements qualify, but routine repairs or general maintenance to an existing HVAC system do not. For instance, installing a new, internal HVAC unit in a retail store would qualify, whereas simply repairing a faulty thermostat would not. It is important to distinguish between mere repairs and substantial capital expenditures that add to the property’s value or prolong its useful life. The improvement must be to the interior of a nonresidential building and not involve enlargement, elevators, escalators, or changes to the internal structural framework.
Calculating and Reporting Bonus Depreciation
To calculate bonus depreciation for a qualified HVAC system, the applicable percentage for the year the system was placed in service is applied to its cost. For assets placed in service after January 19, 2025, the bonus depreciation rate is 100%. For example, if a qualified HVAC system costing $50,000 was placed in service after this date, the entire $50,000 could be deducted in the first year.
Taxpayers report bonus depreciation on IRS Form 4562, “Depreciation and Amortization.” Part II of this form is used for claiming the special depreciation allowance. Businesses provide details such as a description of the HVAC system, the date it was placed in service, its original cost, and the percentage of business use. This calculated bonus depreciation amount is then reported on the business’s tax return.
While Section 179 expensing is another method for deducting the cost of certain assets in the year they are placed in service, it is an alternative to bonus depreciation for the same asset. Businesses choose the method that provides the most advantageous tax benefit. Maintaining accurate records, including receipts, invoices, and documentation of the installation date, is important for substantiating the deduction in case of an IRS inquiry.