Contributor:
Andre Kohn | Tax Credits & Incentives Advisory Senior Associate
The Inflation Reduction Act (IRA) of 2022 greatly strengthened the Section 179D Energy Efficient Commercial Buildings Deduction (Section 179D) to be an incredibly valuable tax provision for architecture and engineering, construction and real estate firms. The new changes went into effect on January 1, 2023, nearly tripling the Section 179D deduction for qualified buildings and expanding the types of buildings eligible.
Increased Maximum Deduction
Originally, Section 179D was equal to the lesser of $1.80 per square foot of the building or total cost of the construction project and is available for both new construction and the retrofit of existing buildings. The $1.80 per square foot maximum was later increased to $1.88 per square foot in 2022, to adjust for inflation. Now with the changes brought forth in the IRA, the maximum deduction increased to $5.00 per square foot for an eligible building.
Increased Deduction Frequency
To encourage the regular update of these energy-efficient buildings, beginning in 2023, the deduction may now be claimed every four years for a tax-exempt building. The new provision will allow a design team to plan for these deductions well into the future as they work with their tax-exempt clients to upgrade their facilities.
Expanded Deduction Includes Tax-exempt Entities
One of the most exciting additions to this deduction will take effect this year: expanding Section 179D to include private tax-exempt entities. Private institutions (i.e., churches, nonprofit hospitals, private schools, tribal governments, etc.) may allocate a Section 179D deduction to an eligible taxpayer, such as an architect or engineer.
Decreased Minimum Energy Cost Savings
To be eligible for Section 179D, buildings must meet certain energy-efficiency standards, such as those established by the American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE). An eligible building will be compared to a reference building, modeled using ASHREA 90.1-2007 standards, and will demonstrate an annual energy cost savings of 50% against that 2007 standard.
2023 will see major changes in how this deduction is calculated. An eligible building will now receive a maximum deduction of $0.10 per square foot per percentage point of calculated energy cost savings. This will begin at $2.50 per square foot at 25% annual energy cost savings, and will be capped at $5.00 per square foot at 50% annual energy cost savings.
New Requirements for Prevailing Wage and Apprenticeship Programs
With new opportunities comes additional requirements. Beginning in 2023, for an eligible construction project to receive the maximum $5.00 per square foot, that project must pay prevailing wages to all contractors and subcontractors. Additionally, that project must participate in, or make a reasonable effort to participate in, an apprenticeship program. If these requirements are not met and correctly documented, the maximum deduction falls to $1.00 per square foot. Both requirements take effect on January 31, 2023. Any project that began before that time, regardless of when it is finished, will not need to meet the prevailing wage and apprenticeship requirements.
To learn more about the new Section 179D Advantages and requirements, please reach out to Tax Services advisor.
