The recently passed Inflation Reduction Act (“IRA”) on the 179D deduction is incredibly important and lucrative new legislation for the Real Estate and Construction industry. The 179D is a tax deduction to incentivize builders and building designers to create energy-efficient commercial buildings. The IRA increased the maximum tax deduction from $1.80 per square foot to $5.00 per square foot.
Mark Cooter, Cherry Bekaert’s Real Estate and Construction Practice Leader, invites Ron Wainwright, Strategic Tax Partner and Leader of the Firm’s Energy Practice within the Tax Credits and Incentives Advisory group, and Bill Harbeson, a manager at Cherry Bekaert, to discuss the impacts of this legislation as well as how to qualify and what to look for in a 179D provider to take advantage of this beneficial tax deduction.
The Podcast Covers:
- Introduction to 179D
- New Updates to 179D with the Inflation Reduction Act of 2022
- How to Qualify for 179D
- What does a taxpayer need to look for in a 179D provider?
Subscribe today for further information from Cherry Bekaert on the different benefits and tax credits the real estate and construction companies can qualify for and receive.
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MARK COOTER: Hello. My name is Mark Cooter, and welcome to another podcast from our Real Estate and Construction practice.
MARK COOTER: Today's podcast will be on hot topics with respect to 179D energy efficiency deductions. Be sure to look out for future podcasts; an upcoming episode will be on the 45L tax credit for multifamily and residential properties, which is also applicable to some new laws we'll discuss today. We will also have thought leadership pieces on the 179D topic on our website in the future.
MARK COOTER: As I said, my name is Mark Cooter. I am the managing partner for the Real Estate and Construction industry practice for Cherry Bekaert. I want to welcome everyone today to this podcast, and I'm going to turn it over to our speakers.
MARK COOTER: The first one I'd like to bring on is Ron Wainwright. Ron, do you want to introduce yourself and tell us a little bit about yourself?
RON WAINWRIGHT: Thank you, Mark. Welcome to all of our listeners today. We appreciate you joining us for this podcast on 179D. As Mark introduced me, I'm a strategic tax partner in the firm. I've been with Cherry Bekaert 12 years and lead our energy practice, which 179D falls within. Thank you for joining.
RON WAINWRIGHT: I'll turn it over to one of my colleagues, Bill Harbison, for his introduction.
BILL HARBISON: Thanks, Ron and Mark, for the intro, and thank you to everybody else for tuning in. As Ron said, my name is Bill Harbison. I've been involved in the 179D realm for about seven years, and before that I spent about 10 years in the construction industry, starting with installing HVAC and moving into construction management and construction engineering.
BILL HARBISON: I hope I can provide a unique point of view on these incentives and the industries we're trying to serve.
MARK COOTER: Thanks, Ron. Thanks, Bill. Bill, just to set the stage a little bit before we get into recent changes, there might be some people in our audience who are not exactly sure what we're talking about today. Can you tell us exactly what the 179D deduction is as it relates to energy efficiency?
BILL HARBISON: Absolutely. There are a lot of exciting things to cover today. For anyone who hasn't heard about it before, the 179D incentive is the energy efficient commercial buildings deduction. It was passed as part of the Energy Policy Act of 2005 to incentivize the design and construction of energy efficient buildings.
BILL HARBISON: It was further expanded in 2008 when the government noticed that government buildings were drawing a lot of power and that the AEC industry was particularly impacted by the economic downturn. In 2008, it was expanded so that a government entity could allocate a 179D deduction to an eligible designer, and that's a key point we want to discuss today.
BILL HARBISON: The deduction amount has been a maximum of $1.80 per square foot for an eligible project, which can be significant for larger facilities like hospitals and schools. The $1.80 (or the inflation-indexed $1.88 for 2022) is changing, and I'll turn things over to Ron to talk about the new expansions.
RON WAINWRIGHT: Mark, as you know, and I hope our listeners know, there was significant tax legislation signed referred to as the Inflation Reduction Act of 2022, or the IRA. For our purposes, we refer to it as the IRA, not to be confused with individual retirement accounts.
RON WAINWRIGHT: The Inflation Reduction Act is a monumental piece of tax legislation. It funds nearly $370 billion to ensure energy security, reduce carbon emissions, increase energy innovation, and support overall energy efficiency. The IRA relies heavily on the Internal Revenue Code to advance deployment of clean energy technologies, and today we'll be specific to 179D.
RON WAINWRIGHT: 179D is specific to commercial building construction. As Bill highlighted, it was part of the Energy Policy Act of 2005 and has been extended since then; it was made permanent in the statute. There is a lot of important change around 179D.
RON WAINWRIGHT: Probably the first and most important change in the IRA is that it increases the deduction from the $1.80 (indexed to $1.88 for 2022) to up to $5 per square foot, depending on the energy efficiency of the building. To qualify for the higher amounts, you must model the building against certain standards, specifically ASHRAE Standard 90.1-2007.
RON WAINWRIGHT: Previously, under the old law for taxable years ending prior to December 31, 2022, the building's energy efficiency had to exceed 50 percent of the ASHRAE standard. The IRA lowered that threshold from 50 percent to 25 percent, substantially broadening eligibility while increasing the potential deduction to $5 per square foot.
RON WAINWRIGHT: The IRA also expanded 179D eligibility to tax-exempt entities. An architect or engineering firm that performs design and energy efficiency work for a governmental entity at the federal, state, or local level could receive an allocation of the 179D deduction. Now, design work for tax-exempt entities may also allow for a transfer of the deduction.
RON WAINWRIGHT: The IRA removed partial deductions that previously applied to interim lighting and garages; effective January 1, 2023, those partial deductions were eliminated. The legislation also added prevailing wage and apprenticeship requirements to earn the bonus amount up to $5 per square foot.
RON WAINWRIGHT: The prevailing wage requirement is intended to ensure that a taxpayer hires laborers and mechanics at prevailing wages during construction or during the relevant credit period. The apprenticeship requirements require that a certain percentage of labor must be part of qualified apprenticeship programs.
RON WAINWRIGHT: The IRA introduced a three- to four-year reset mechanism. Previously, if you claimed 179D, that was generally one-time. Now you can reset and potentially claim the enhanced deduction every three to four years.
RON WAINWRIGHT: There are also bonus deductions tied to qualified plans, focusing on energy cost reduction versus energy intensity reduction. If a project is part of a qualified plan, it may be eligible for the 179D deduction under those rules.
RON WAINWRIGHT: These are significant changes in the IRA. For architects, engineers, and commercial building owners, this will substantially affect tax planning and potential benefits for buildings placed in service in 2023 and beyond.
MARK COOTER: To sum up, the IRA lowered the standard and increased the benefit. Bill, how does one qualify for 179D, and what hoops must be jumped through to ensure qualification?
BILL HARBISON: The short answer is that we will manage the process for you as a taxpayer. Cherry Bekaert provides services to navigate this complex process.
BILL HARBISON: Potentially qualifying parties fall into two main buckets. First, and originally intended in 2005, is a commercial building owner. If you purchased, constructed, upgraded, or expanded a commercial building since 2005, you may qualify to claim a 179D deduction for relevant upgrades such as HVAC work.
BILL HARBISON: The second bucket, which is an exciting expansion under the IRA of 2022, is that now many commercial buildings can qualify through allocation. Previously, tax-exempt buildings—nonprofit hospitals, churches, private schools—had large deductions available but no party to claim them. Now, if an architect, engineer, qualified design builder, or energy service provider performs design for a tax-exempt building, the tax-exempt entity can allocate the deduction to that service provider.
BILL HARBISON: If you provided services to a for-profit corporation, that party can claim the 179D deduction, and you should notify them as a means to recover some costs. If it is a tax-exempt building, you can claim the deduction yourself through the prescribed 179D process.
BILL HARBISON: If you fall into one of those buckets, reach out to Cherry Bekaert for a no-cost evaluation of your projects, whether construction you conducted or engineering services you provided to a tax-exempt entity. There are many questions to ask and boxes to check, and we perform that evaluation.
BILL HARBISON: If you have done such services in the past several years or plan projects coming online in the next year, let us know and we'll evaluate potential deduction amounts.
MARK COOTER: We've discussed what 179D is and how to qualify. Ron, what should someone look for in a provider to help them through this process?
RON WAINWRIGHT: Even though the enhanced provisions of 179D took effect January 1, 2023, if an A&E firm or a developer is currently in the design phase, you should evaluate the new law now. We can assist by running models to ensure you maximize the deduction up to $5 per square foot.
RON WAINWRIGHT: There is a lot of complexity in the new modeling requirements compared to the old law. Cherry Bekaert has the tax and accounting experience to ensure you meet all required provisions to maximize the deduction, including prevailing wage and apprenticeship requirements.
RON WAINWRIGHT: The base deduction now starts at 50 cents per square foot, building toward a higher base and then a bonus that can reach $2.50 per square foot or effectively five times the base. Meeting certain energy efficiency requirements will make the project eligible for the $5 per square foot amount.
RON WAINWRIGHT: We recommend modeling now so that, during the design or development phase, you can make changes to achieve the $5 per square foot deduction, whether you are an A&E firm seeking allocation or a developer constructing a building.
RON WAINWRIGHT: In May of this year, the Internal Revenue Service issued an Audit Technique Guide for 179D. We will publish a thought leadership article and another podcast describing the old legislation and the new legislation effective January 1, 2023.
RON WAINWRIGHT: You need to begin thinking about this now. Cherry Bekaert is already working with A&E firms and clients to ensure they maximize benefits given the expansion of the deduction for projects placed in service in 2023 and 2024.
MARK COOTER: That concludes our podcast for today on the new 179D energy efficiency deduction rules. Please look forward to another podcast on the 45L credit, which benefits both multifamily and residential developers and people improving their property.
MARK COOTER: I'll turn it over to Ron for any final comments.
RON WAINWRIGHT: We hope this podcast has been informative. There is a lot of complexity coming out of the IRA around 179D and 45L. The IRA directs $370 billion in direct investments with respect to energy provisions within the tax law, and we want to ensure our listeners plan now for commercial buildings placed in service and for A&E firms that may receive allocations of the deduction effective January 1, 2023. Thank you for attending.
BILL HARBISON: Ron and Mark, thank you again for including me in the conversation today. As a member of the AEC industry, both as a practitioner and an advocate, this is one of the most exciting times in my career watching this powerful incentive expand and the businesses it will affect.
BILL HARBISON: I look forward to being part of the listeners' journeys through the 179D practice. We encourage you to reach out with questions. Thank you.
