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HVAC tax deductions

 

Depreciation is a natural fact of life, as nothing stays in optimal condition for long. Whether purchasing a car, house, or HVAC unit, its tax life or depreciation rate should be top-of-mind as you compare your options and pricing. 

That said, tax life is a factor that often gets woefully overlooked when shopping for a new HVAC unit. Consumers prioritize heating and cooling output, SEER rating, size and weight, and cost. 

Those are important factors, but the HVAC unit’s tax life is right up there with them, especially if you’re interested in upgrading a unit for longevity. 

Discover the basics of HVAC tax life, learning what the average lifespan is and what, if anything, you can do to extend it. 

Understanding Tax Life

Class life or tax life refers to how long you can depreciate an asset. Depending on the type of asset, its tax life is only allowed for so long under United States tax law. 

For example, trucks and other automobiles have a tax life of five years. It’s seven years for office furniture and 39 years for real property. 

The IRS makes these estimates based on how long the item should be useful. The class life estimates assume normal usage. For example, while a car has a relatively good lifespan of five years, it might only be two or three years if you drive your car thousands of miles every month or two. The tax life could be even shorter still!

Understanding tax life allows you to claim depreciations properly on your taxes. 

What Is the Tax Life of HVAC Unit?

Heating and cooling taxes

The depreciation rate or tax life of an HVAC unit varies depending on whether you opt for a standalone unit for your home or business or a unit within an HVAC system. It also depends on whether you use the HVAC for residential or commercial use. 

For example, the average life of an air conditioner as part of an HVAC system is typically 27.5 years. If you have a commercial real estate HVAC system, the tax life increases to 39 years. However, a standalone HVAC unit has a much lower tax life of only seven years. 

The tax life of HVAC units is not set in stone. Just as a car can depreciate faster if you drive it often and wrack up mileage, your HVAC unit’s class life can rapidly decrease depending on how well you care for it. 

Calculating Tax Life

The most common depreciation method is called the Modified Accelerated Cost Recovery System or MACRS. You can calculate depreciation rate even for uncommon goods such as HVAC units.

Here’s how it works. You combine MACRS data with class life estimates and a basis. 

Let’s explain basis first before diving in deeper. 

A basis is what you originally spent on the asset, including installation, freight, and sales taxes. The basis also includes its value when bartered, the value of traded items for the asset, how much you borrowed (if anything) for the asset, and cash value. 

The more depreciation deductions, the lower the basis. Oppositely, by improving upon the asset, the basis increases. If you decide to sell the asset, the adjusted basis determines your losses and gains. 

Bearing that in mind, here is how MACRS percentages affect the tax life of an item over a multi-year period:

  • First year: 33.33 percent for a three-year tax life, 20 percent for a five-year tax life, and 14.29 percent for a seven-year tax life
  • Second year: 44.45 percent for a three-year tax life, 32 percent for a five-year tax life, and 24.49 percent for a seven-year tax life
  • Third year: 14.81 percent for a three-year tax life, 19.20 percent for a five-year tax life, and 17.49 percent for a seven-year tax life
  • Fourth year: 7.41 percent for a three-year tax life, 11.52 percent for a five-year tax life, and 12.49 percent for a seven-year tax life
  • Fifth year: 11.52 percent for a five-year tax life and 8.93 percent for a seven-year tax life
  • Sixth year: 5.76 percent for a five-year tax life and 8.92 percent for a seven-year tax life
  • Seventh year: 8.93 percent for a seven-year tax life
  • Eighth year: 4.46 percent for a seven-year tax life

Can You Improve an HVAC Unit’s Tax Life? 

 

If learning the depreciation rate of your HVAC unit is having you reconsider your purchasing decision, know that the following strategies can impact the unit’s rate of depreciation.

Don’t Buy a Standalone HVAC Unit

The tax life of a standalone HVAC unit is drastically lower than that of an HVAC system. You’re ultimately missing out on about 20 years! If you’re still in the browsing and shopping phase, expand your search parameters to include entire HVAC systems. 

A whole system is costlier than a standalone unit but has a slower rate of depreciation, so the cost balances out over the years. 

If you already bought and installed a standalone HVAC unit, you can always look into expanding the unit. 

Maintain the HVAC Unit

Taking good care of your HVAC unit and keeping it operable is one of the most surefire ways to extend its tax life. Schedule regular maintenance with a technician at least twice a year. Keep the unit free of external debris, from sticks and branches to stones and snow. 

Change the filters every six months or so, and contact your technician if you notice any strange behavior with the HVAC unit, such as clunking, rattling, and inefficient heating or cooling. 

Address HVAC Repairs Immediately 

Even with maintenance, HVAC components can break down eventually, leaving you without many options. When an issue arises, don’t sit on it. Contact your HVAC technician for repairs, even emergency reparations if necessary. 

The longer you go without getting the unit fixed, the worse the problem can become. 

Tips for Taxing an HVAC Unit 

Now that you have a grasp on depreciation rate, here are some tips that will help you apply the class life toward your HVAC unit just in time to file your business taxes.

Know What Qualifies as HVAC

HVAC is a broad term, so here are some components that you can incorporate into your tax expenses:

  • Variable air volume units
  • Thermostats
  • Makeup air units
  • Air handlers
  • Terminal units
  • Compressors or condensers
  • Evaporators
  • Air-cooled chillers
  • Rooftop units
  • Cooling towers
  • Chiller systems
  • Heat pumps
  • Water-cooled chillers
  • Furnaces
  • Piping systems
  • Ductwork systems
  • Ductless mini split systems
  • Packaged terminal units
  • Boilers
  • Air conditioners 

Use the BARI Method

HVAC tax rebates

BARI is a tax acronym that stands for betterment, adaptation, restoration, and improvement. 

To determine if an HVAC unit is considered betterment, ask yourself some questions. Did you add an HVAC unit because you made the building or home larger? The HVAC counts as capitalized in that case.

Did you upgrade the unit because of technological advancements or older components were unavailable? If using an older unit is impractical, you can consider it a betterment. 

What did you replace the HVAC unit with? It’s a betterment if the output, quality, strength, efficiency, and/or productivity improves with the new unit. 

You can also consider a new HVAC unit a betterment if it was purchased within 18 months of improving material defects.

An HVAC unit is adapted for new use and can be capitalized if its fees were included as part of a building conversion that changed or expanded the building’s use. It’s considered a restoration that can be capitalized if a casualty event occurred, and you add a casualty loss to your taxes. 

A capital improvement occurs if you added the HVAC unit as part of a capital improvement project.

Gauge the Unit of Property

A unit of property or UOP requires you as a taxpayer to add the whole HVAC system as a UOP if you lease or own the whole building. If you only own part of the building, such as leasing some of it to a renter, you can only qualify the leased HVAC unit portion as a UOP.