Don’t Let These IRA Tax Breaks Slip Away for 2023 Construction Projects

The added benefit of tax incentives makes it an easy choice to begin planning 2023 and beyond with 179D.
By Evangelia Dislaki
January 24, 2023

The passing of the Inflation Reduction Act provides numerous tax advantages for construction and development. One of these incentives is the redevelopment and expansion of the 179D Commercial Buildings Energy-Efficiency Tax Deduction, created to encourage those in the industry to go green on future projects while making money back on their investment.

179D is one of several tax incentives not being leveraged by contractors, due to the fact that many do not know it exists. Taking the time to discover the different tax breaks available is paramount, as talks of a recession and mass upticks in inflation are directly affecting every business. As the redeveloped 179D becomes applicable for projects beginning in 2023, now is the perfect time to evaluate energy efficiency retrofits (to reduce total consumption) and renewable energy installations (to offset the cost of consumption) where the tax incentive can be applied.

What the update to 179D entails

The 179D Energy Efficient Commercial Building Deduction provides a deduction of up to $1.88 per square foot for building owners developing or renovating a new or existing energy-efficient project. While the current state of 179D remains in effect through Dec. 31, 2022, the following new regulatory effects will come with the new year–to be leveraged in tax season 2024:

  • The minimum additional energy savings requirement as compared to the benchmark according to the ASHRAE 90.1 standard in effect four years prior to the building’s placed-in-service date was reduced from 50% to 25%.
  • The interim lighting rule as well as the existing rules for partial qualification–$0.60 per square foot for each HVAC, lighting and building envelope–are scratched.
  • Higher 179D deductions for meeting higher prevailing wage and apprenticeship requirements. When the threshold is met and the building achieves a 25% reduction in total annual energy and power costs, the deduction comes to $2.50 per square foot. For every additional percentage of reduction, an added $0.10 of savings is acquired up to $5.00 per sq. ft.

    When prevailing wage and apprenticeship requirements are not met, the deduction is $0.50 per square foot at a 25% reduction. Additional reductions increase the deduction by $0.02 per square foot, up to $1.00 per square foot.
  • The 179D deduction can now be taken more than once over the life of the building. Specifically, the deduction can be taken again if more than 3 years, in the case of commercial buildings, or 4 years, for buildings owned by a tax-exempt entity (where the deduction is allocated to the designer), have elapsed since the previous claim. Under the old law, there was a lifetime cap on the 179D deduction that could be claimed ($1.80 per square foot and adjusted for inflation).

While 179D was only allocated to public agencies, the Inflation Reduction Act expands it to all tax-exempt entities–Private schools, churches, charitable organizations and other organizations under IRC 501(c). Additionally, all hospitals now qualify for 179D as tax-exempt hospitals now fall under the qualifying umbrella. This broadens the scope of what is considered a requirement, allowing many new contractors to leverage the tax benefits.

Furthermore, the Inflation Reduction Act created a retrofit program for an alternative deduction for building retrofits, requiring an ESG-focused plan on energy use intensity (EUI) rather than the total annual energy and power costs.

If a project on the horizon requires the energy use intensity improvement of a more-than-50,000-square-foot office, all while incorporating ESG-focused retrofits, it has the potential of reaching a tax deduction of up to $120,000 with a 25% reduction in EUI. With such a massive deduction and the implementation of energy-saving practices, projects will begin paying themselves back beginning with their first day of use.

Beyond savings as an incentive

The Inflation Reduction Act serves as a beacon for the future of construction going green. Due to the saturation of tax deductions going to ESG incentivization, everyone in the industry should be looking to prepare future projects with them in mind for a possibly massive cost reduction.

Beyond possible project savings, several motivating factors include:

  • Creating an energy-efficient building that won’t cost as much to heat or cool due to its energy efficiency–resulting in further cost savings beyond the tax deduction.
  • The world itself is shifting to a more ESG-regulatory stringent environment. Preparing now for that future will save on unnecessary retrofit planning.
  • Contractors are uniquely placed to access 179D already, with no downside or sacrifice to leverage the deduction.

Apart from the financial bonus, the positives lie in economic and climate investment. Putting ESG-prioritization at the forefront develops new jobs while helping the country become a global leader in the fight against climate change.

No time like the present

The prioritization of ESG-related construction is important if you’re going to compete in an environment with increased regulatory stringency. The added benefit of tax incentives makes it an easy choice to begin planning 2023 and beyond with 179D. As several sectors in building and construction are going green congruently, there is no time like the present to begin the planning process for upcoming projects with these tax incentives as catalysts.

by Evangelia Dislaki

Evangelia Dislaki first joined Leyton, an international consulting firm leading organizations to discover tax credit opportunities, as an engineering consultant and has been promoted three times to a product manager. She brings a diverse background coming from Greece while obtaining a Master’s and PhD in Zurich and Spain. Evangelia is proficient in four languages, allowing her to preserve those cultures and better communicate with clients. She has managed to be a key leader in multiple industries while leading her team to more success. 

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