Huge Changes for Commercial Construction in 2023! How Inflation Reduction Act Section 179D changes construction.

The 179D Deduction is a tax incentive that every project manager, owner, and contractor involved in commercial projects needs to understand.?Almost every commercial construction project underway in the United States today can potentially qualify for up to a $5.00 per square foot tax deduction, often without modifying plans from current design.?Documentation requirements are high but can be easily managed by an energy consulting and accounting firm to maximize the deduction without a hassle.

A little background for context

The Energy Efficient Commercial Building Deduction (Section 179D) was greatly expanded through the Inflation Reduction Act, but the underutilized program has been a tax incentive since 2005.?Because of a relatively low benefit (limited to a maximum of $1.80 / square foot) and some high documentation requirements, only a small portion of eligible projects claimed 179D in the past.?With the potential incentive almost tripling in the Inflation Reduction Act to up to $5.00 per square foot, the deduction is now a must-claim on all eligible projects!

Why is the new 179D a big deal?

1)?????The tax deduction is much larger.

The deduction has a sliding scale based on energy efficiency modeling, with $2.50 - $5.00 per square foot. For example, a 25,000 square foot building that undergoes an upgrade can potentially earn up to a $125,000 tax deduction in 2023!?That same project last year would have been just up to $45,000.

2)?????The project you’re doing is likely eligible.

In addition to commercial building and renovations, the IRA expanded 179D to include deductions for projects for Real Estate Investment Trusts (REIT), state and municipal governments, not-for-profit organizations, schools, churches, universities, museums, and more.??Almost every project should be looking at how to maximize this deduction.?

3)?????2007 Energy Standards.

Projects in 2023 are compared to ASHRAE 90.1 2007, which is an energy code of over 15 years ago.?Because of the current energy code, most new construction will qualify for at least $2.50 per square foot deduction, even if energy efficiency is not a primary project consideration.?If your project has an energy saving focus (i.e. pursuing LEED), it is likely to qualify for the full deduction of $5.00 per square foot. Just by meeting current energy code with LED lighting, insulation and mechanical efficiency, your project likely is at least 25% more efficient than the 2007 standards, which didn’t require LED lighting and had lower efficiency requirements.??

How do I qualify?

1)?????Get an energy model.

The project must develop a qualified energy model that compared the efficiency of the design to the 2007 ASHRAE standard noted above.??The amount of the deduction is a sliding scale of $2.50 - $5.00 based on the percentage of efficiency compared to this standard, with 25% being the minimum and 50% or more qualifying for the maximum deduction.?For example, a project that shows through an energy model to have a 41% efficiency compared to ASHRAE 90.1 2007, would be eligible for a deduction of $4.10 per square foot.

2)????Meet prevailing wage requirements.

To qualify for the deduction, the project must document that across all trades and labor classifications laborers and mechanics were paid at least the prevailing wage for their location and job function.?This increases documentation and record-keeping requirements but is done to ensure that projects that benefit from government incentives are paying their workers a prevailing wage.

3)?????Meet apprenticeship requirements.

Similarly to wage requirements, projects must adhere to apprenticeship requirements.?In short, for projects in 2023, 12.5% of labor hours need to be documented as qualified apprenticeship labor hours. ?This increases to 15% in 2024.?If apprenticeship labor hours cannot be met, documentation of a good faith effort can suffice as apprenticeship programs ramp up.?

What do I need to do?

1)?????General Contractors

Commercial GCs will bear the burden of documentation, particularly for the Prevailing Wage and Apprenticeship requirements.?GCs should look at all projects in construction and in the pipeline and start a documentation process with all subcontractors of labor.?Either designate an internal contact or hire an outside consultant to coordinate and verify prevailing wages and apprenticeships.

2)?????Project Stakeholders (Owners, Project Managers, etc.)

Determine (based on square footage) whether it’s worth the effort to pursue the deduction.?Generally speaking, if a project is smaller than 10,000 square feet, the cost to complete an energy model and document the project will likely offset the value of the deduction.?As the project gets larger, the value of the deduction increases compared to the cost to model and document. ?

3)?????Trade Contractors

Electricians, plumbers, HVAC contractors, carpenters, and all trades should begin to research and document apprenticeships and prevailing wages.?This will soon be a standard requirement on all commercial jobs so that they can qualify for 179D deductions.

About the Author

Caleb Quaid is the founder of Regenerative Shift, a Tampa-based environmental consulting firm, working with businesses and communities on regenerative environmental initiatives and sustainability programs.?Regenerative Shift focuses on life-creating and cost-saving holistic programs, including regenerative land and water projects and Inflation Reduction Act (IRA) consulting.?As a public speaker, Caleb provides motivating insight into practical life-creating environmental practices and shows the business case for going green with tax incentives under the IRA.

Now what?

The IRA can be a lot to navigate, and new guidance is issued every week.?If you’d like to discuss how your business can benefit, Regenerative Shift is here to help!?Reach out today at [email protected] to set up a free consultation!