Legislation Makes 179D Deduction More Valuable For 2023

The 179D tax deduction provides building owners a deduction for new or remodeled commercial buildings that meet specific energy-efficient qualifications. This deduction is also available to designers of buildings owned by government entities and non-profit organizations. The Inflation Reduction Act of 2022 (“the Act”) allows for increased credits and/or deductions for various green energy credits, including the 179D deduction, if the owner/designer meets certain prevailing wage and apprenticeship requirements. The Act also lowers the minimum required savings in total annual energy and power cost from a 50% reduction to a 25% reduction. If the requirements are satisfied, the maximum 179D deduction is increased from $1.88/sq. ft. to $5.36/sq. ft. when there is a 50% reduction in energy and power costs and $2.68/ sq. ft. when a 25% reduction is achieved. If the prevailing wage/apprenticeship requirements are not met, the Act reduces the deduction amount range from $.54 per sq. ft. (25% reduction) to $1.07 per sq. ft. (50% reduction).

As a further benefit, the Act eliminates the lifetime limit to the 179D deduction. Now, the deduction can be taken every three tax years (four in some situations). Previously, if a taxpayer constructed a building and took the maximum deduction of $1.88 per square foot, the taxpayer was unable to take additional 179D deductions for subsequent energy efficiency improvements. Beginning in 2023, the Act now allows for additional 179D deductions for subsequent energy improvements.

On November 30, 2022, the IRS issued Notice 2022-61* (“the Notice”) which provides guidance regarding the prevailing wage and apprenticeship requirements that are effective as of January 29, 2023. For projects that “began” construction prior to January 29th (as defined in “the Notice”), a company can get the enhanced 179D deduction without meeting the prevailing wage and apprenticeship requirements. However, from January 29, 2023 on, the enhanced deduction is only available if the company meets the new requirements.

Prevailing Wage Determinations

The Notice indicates that the prevailing wage rate varies based on factors such as geographic area, type of construction performed and labor classifications for the construction work being done on the project. The Secretary of Labor has published wage determinations at www.sam.gov based on these factors. Taxpayers may rely on the published wage determinations to qualify for the enhanced 179D deduction. In the absence of published guidance for a particular geographic location, type of construction or labor classification, the Notice provides that a taxpayer must contact the Department of Labor (DOL) and request a wage determination based on its facts and circumstances. The prevailing wage requirement applies to all individuals compensated by the taxpayer in exchange for services performed regardless of whether or not the individual is classified as an independent contractor for other tax purposes.

Apprenticeship Requirements

A taxpayer complies with the apprenticeship requirement if a sufficient amount of labor hours are performed by qualified apprentices as a ratio to total labor hours for the project. For 2023, 12.5% of total labor hours must be performed by qualified apprentices. The Notice provides for a Good Faith Effort Exception in which the taxpayer will be considered to have made a good faith effort in requesting qualified apprentices if the taxpayer requests qualified apprentices from a registered apprenticeship program in accordance with usual and customary business practices for registered apprenticeship programs in a particular industry.

Example 1: ABC Engineers (ABC) is engaged by the City of New York (NYC) to design a municipal building. NYC allocates the entire 179D deduction to ABC. The new building is 500,000 square feet. NYC incurs $100 million of costs to place the building into service. ABC implements a design that achieves a 50% enhancement in energy efficiency and meets the requirements for prevailing wage and apprenticeship. ABC is entitled to a $2,680,000 tax deduction (500,000 x $5.36) in the year in which the building is placed in service. If ABC does not meet the prevailing wage requirements, the deduction decreases to $535,000 (500,000 x $1.07).

Example 2: The American Red Cross contracts with Smith Architects to design the construction for their 300,000-square-foot new headquarters at a cost of $60 million. Smith devises a building plan which reduces energy usage by 25% and also meets the requirements for prevailing wage and apprenticeship. Smith will generate a $804,000 tax deduction (300,000 x $2.68). If Smith does not meet the prevailing wage requirements, the deduction decreases to $162,000 (300,000 x $.54).

In conclusion, the enhanced 179D tax benefits will make 179D-compliant projects much more attractive to A/E/C businesses if they can comply with the requirements associated with the enhanced deduction. For more information on how the expanded 179D tax deductions may benefit your company, please reach out to Phillip Ross, Joe Molloy, Marty Arking, or your Anchin Relationship Partner.

*Please note that the IRS issued a correction to Notice 2022-61 on December 7th to change the effective date from January 30th to January 29th.