Abby K. SweersThe Inflation Reduction Act (IRA) of 2022 significantly enhanced the Section 179D deduction, making it even more valuable for businesses investing in energy-efficient commercial building property (EECBP) and energy-efficient commercial retrofit property (EECRP). This deduction provides substantial tax savings for building owners and now also benefits design professionals working on tax-exempt buildings.
Key Changes Under the IRA
Before the IRA, the Internal Revenue Code Section 179D offered a maximum tax deduction of $1.80 per square foot (adjusted for inflation) for qualifying properties. To qualify, the EECBP needed to be installed on or in a building located in the U.S., with plans to reduce the annual energy costs by at least 50%. Additionally, the building must have been owned by the taxpayer.However, the IRA lowered the energy savings threshold to 25%, allowing countless additional projects to be eligible for the deduction.
Another major change is the deduction amount per square foot, which increased from the flat $1.80 per square foot to a potential $5.00 per square foot (adjusted for inflation) for projects that meet prevailing wage and apprenticeship requirements. Projects that do not meet these requirements still qualify for deductions; however, the amount per square foot is substantially lower and varies depending on the level of energy savings achieved.
Wage and Apprenticeship Requirements
To claim the maximum deduction, companies must comply with two key labor requirements:
Prevailing Wage: Laborers and mechanics must be paid prevailing wages set by the Department of Labor. Accurate records must be maintained and preserved for all work performed to ensure wages are not below the prevailing rates. Non-compliance could result in penalties, but companies can correct wage discrepancies with interest of up to three times the amount.
Apprenticeship: Any company, contractor or subcontractor with four or more employees must meet apprentice labor hour requirements—10% before 2023, 12.5% in 2023, and 15% after 2023. This requirement can also be met by paying certain penalties per labor-hour shortage. Companies unable to meet these requirements due to a lack of available apprentices may qualify for a good-faith effort exemption.
Expanded Eligibility for Allocation
Another significant update in the IRA allows Section 179D deductions claimed on buildings owned by tax-exempt entities to be allocated to project designers, enabling them to claim the deduction. A game-changer for firms working with public institutions, nonprofits and other qualifying entities.
Claiming the Deduction
To qualify, businesses must complete an approved energy study to verify compliance with efficiency standards and file IRS Form 7205 with their tax return. Proper documentation is crucial to ensuring compliance with the updated requirements.
Win-Win
With the enhanced Section 179D deduction, contractors and design professionals can achieve greater tax savings while making long-term investments in energy-efficient infrastructure and sustainability.
Abby K. Sweers, CPA, is a tax senior manager at Dannible & McKee, LLP, a Syracuse-based public accounting firm that has been delivering expert tax, audit, accounting, valuation and consulting services since 1978. For more information on this topic, contact Abby at asweers@dmcpas.com. To learn more about Dannible & McKee, please visit DMCPAS.COM.
