The Inflation Reduction Act (IRA), signed into law on August 16, 2022, significantly increases IRC Section 179D energy tax deductions. These tax incentives are highly advantageous to architectural and engineering (“A&E”) firms responsible for the design components of government-owned, energy-efficient buildings. The IRA also extends the deduction to designers of commercial buildings owned by tax-exempt organizations, including not-for-profit organizations, churches and other religious organizations, tribal organizations, and not-for-profit schools and universities.
Ron Wainwright, a Partner in Cherry Bekaert’s Tax Credits and Incentives Advisory group, joins Scott Duda, Leader of the Firm’s Professional Services Industry practice, to discuss how A&E firms can take advantage of these expanded tax incentives.
Listen in to find out about:
- 1:11 – An overview of the Inflation Reduction Act
- 2:54 – How the IRA will impact A&E firms
- 6:02 – IRC Section 179D Changes
- 12:43 – 45L Energy Efficient Home Credit Changes
- 16:09 – What A&E firms should look out for
If you have any questions specific to your business needs, Cherry Bekaert’s Tax Credits & Incentives Advisory team is available to discuss your situation with you.
Related Insights:
- Case Study: Global A&E Firm Saves $2 Million with 179D Tax Deduction
- Podcast: The Benefits of using a CPA Firm to Perform Credits & Incentives Projects
View All Professional Services Podcasts
SCOTT DUDA: Welcome to Cherry Bekaert's podcast on the 179D deduction for A&E firms. I'm Scott Duda, leader of the Professional Services industry, and with me is Ron Wainwright, Strategic Tax Partner, who will discuss the impact of the recently signed Inflation Reduction Act of 2022 and the 179D deduction coming out of that.
RON WAINWRIGHT: Thank you, Scott. It's good to be here and I look forward to discussing with our listeners this hot topic for A&E firms, specifically Section 179D.
SCOTT DUDA: Ron, can you give us an overview of the Inflation Reduction Act of 2022 and its impact? What is in the law and what do we expect to see?
RON WAINWRIGHT: The Inflation Reduction Act of 2022 (IRA) was enacted in August 2022. The Senate passed it on August 7, the House on August 12, and the President signed it into law on August 16. The bill reinstates and significantly expands a number of incentives, providing approximately $370 billion of new energy-related tax credits over the next 10 years.
RON WAINWRIGHT: This legislation will have a significant impact on companies broadly and specifically on A&E firms, which rely on a number of the funding mechanisms, credits, and incentives in the IRA. These incentives affect a wide range of businesses, both B2B and B2C, and A&E firms are central to construction and design work nationwide. There are a number of provisions that are very specific to A&E firms that we will discuss today.
SCOTT DUDA: With respect to A&E firms, can you highlight areas around the architecture and design work that may lead to tax credits?
RON WAINWRIGHT: One unique feature of the IRA is that it permits taxpayers in particular situations to take advantage of bonus credits. The bonus credits relate to prevailing wage and apprenticeship requirements, domestic content, new energy communities, and provisions for low-income communities. Another key concept is credit monetization, including the direct pay election where a taxpayer can elect a refundable direct payment of a tax credit rather than offsetting tax liability.
RON WAINWRIGHT: For A&E firms, there are four areas of significant impact. First, there is the nonbusiness energy property credit. A&E firms designing nonbusiness buildings will be asked to focus on measures that allow clients to claim nonbusiness energy property credits, including energy property such as water heaters, heat pumps, central air conditioners, hot water boilers, oil furnaces, air sealing, and related measures.
RON WAINWRIGHT: Second, residential clean energy provisions allow taxpayers to claim credits for qualified residential energy property. In design work, clients will ask architects and engineers to design specifically to capture residential clean energy credits.
RON WAINWRIGHT: Third, the energy efficient commercial building deduction—Section 179D—and the new energy efficient home credit are key areas we will cover.
SCOTT DUDA: Can you give A&E firms more detail on the 179D deduction changes in the IRA?
RON WAINWRIGHT: Section 179D, the energy efficient commercial building deduction, originally came into law under the Energy Policy Act of 2005 as a deduction attributable to designers of energy efficiency systems. The IRA substantially expands and extends this deduction beginning in 2023.
RON WAINWRIGHT: Under prior law, a design had to exceed 50 percent of the ASHRAE 90.1-2007 standard depending on the applicable placed-in-service date. The IRA reduces that threshold from 50 percent to 25 percent while continuing to reference ASHRAE 90.1-2007.
RON WAINWRIGHT: The IRA also changes the calculation. The base deduction will be $0.50 per square foot, which previously was $0.60 per square foot. The deduction can increase by $0.02 for each percentage point increase in energy efficiency up to $1.00 per square foot. In addition, the statute includes bonus deductions tied to prevailing wage and apprenticeship requirements.
RON WAINWRIGHT: Under the IRA, if the bonus requirements are met, the deduction can be significantly higher. A&E firms designing for governmental entities—federal, state, and local—could be eligible for a transfer of an energy efficiency deduction up to $5.00 per square foot.
RON WAINWRIGHT: Importantly, the IRA now allows a tax-exempt entity to transfer the deduction as well. Previously, tax-exempt entities such as churches or hospitals were excluded from transferring the deduction to designers. That exclusion is removed, expanding the potential pool of projects that can result in a transferable deduction to architects and engineers.
RON WAINWRIGHT: The IRS recently issued an audit technique guideline that requires specific documentation and certification areas for the energy efficiency deduction. We will have an upcoming podcast discussing that guidance in detail.
SCOTT DUDA: So the IRA lowers the efficiency threshold, increases the potential value of the deduction, expands eligible transferring organizations to include not-for-profits, and increases IRS scrutiny?
RON WAINWRIGHT: Yes. Those are the four key points for A&E listeners.
SCOTT DUDA: There's also a multi-residential credit in the IRA and changes to the residential credit. Can you explain those?
RON WAINWRIGHT: Under the Energy Policy Act of 2005, there was a multi-residential credit. A&E firms that design apartment complexes or other multi-residential projects are often asked to design to certain Energy Star or ResNet standards.
RON WAINWRIGHT: The energy-efficient home credit, commonly referenced as Section 45L, had expired but the IRA retroactively extended it for ten years, covering 2022 through 2032. The IRA increases the value of residential energy efficiency credits and provides contractors with tax credits for housing units built or remodeled to meet energy-saving specifications.
RON WAINWRIGHT: There is also a bonus structure similar to Section 179D. For single-family homes meeting the ENERGY STAR standard, the base credit is $2,500, an increase from prior levels. For manufactured homes meeting the ENERGY STAR Manufactured Homes Program, the base credit is $2,500. For multifamily residences, there are base credits and bonus credits that can reach up to $5,000 per unit for projects meeting zero energy ready or equivalent standards.
RON WAINWRIGHT: For example, a 200-unit multifamily project that qualifies for the $5,000 bonus per unit could generate a substantial credit for the developer or contractor.
SCOTT DUDA: As A&E firms consider ongoing and upcoming designs, what should they evaluate to determine whether deductions or credits apply and how to implement them?
RON WAINWRIGHT: We recommend A&E firms pause and assess current designs because the statute is effective January 1, 2023. The key triggering date is the placed-in-service date. Projects designed in 2022 may have placed-in-service dates in 2023 or later, so A&E firms should plan with the placed-in-service date in mind.
RON WAINWRIGHT: Firms should evaluate whether current designs meet the new or lower standards attributable to Section 179D and Section 45L. That includes assessing energy efficiency performance, potential prevailing wage and apprenticeship compliance, and any documentation needed for certification.
RON WAINWRIGHT: Firms should begin working with clients now to capture these increased incentives for projects that will be placed in service in 2023 and beyond.
SCOTT DUDA: You mentioned Cherry Bekaert will assist clients. What additional thought leadership or resources do you have planned?
RON WAINWRIGHT: Because of the scope of the IRA, we are releasing a number of thought leadership pieces and podcasts specific to A&E clients under Scott's leadership in our Professional Services industry group. Upcoming topics include the IRS audit technique guideline for the energy efficiency deduction and what auditors will review when a deduction is transferred.
RON WAINWRIGHT: We will also cover the key concepts of the bonus credit, explaining prevailing wage and apprenticeship requirements and how A&E firms can help clients maximize benefits. Another upcoming podcast will focus on credit monetization, including direct pay and how taxpayers can elect a direct payment of credits rather than offsetting tax liability.
RON WAINWRIGHT: We will provide detailed guidance on these topics to help A&E clients understand and implement the new incentives.
SCOTT DUDA: We'll look forward to those materials. Please let us know how we can continue to be your guide forward related to these credits and incentives.
