On August 7, 2022, the Senate passed the Inflation Reduction Act of 2022 (“IRA 2022’). The IRA 2022 changes the current 179D tax deduction for energy efficient buildings in a few important ways that are relevant to the construction industry. Below is a breakdown of the current 179D tax deduction and the changes made by the IRA 2022.

The Current 179D Tax Deduction

The current 179d tax deduction, enacted by the Inflation Reduction Act of 2006 (“IRA 2006”) is still applicable to projects until the end of 2022. Per the IRA 2006, a tax deduction of up to $1.80 per square foot (currently $1.88 to account for cost of living increases) is permitted for energy efficient commercial building property that is installed in accordance with the most recent Standard 90.1 published by the American Society of Heating, Refrigeration, and Air Conditioning Engineers (ASHRAE) and the Illuminating Engineering Society of North America that is affirmed by the Secretary no later than two years before the date construction began. The building systems that qualify for the deduction are interior lighting, HVAC, hot water systems, or building envelope elements.

Under the current 179D tax deduction, the qualifying building must be certified as being installed as part of a plan to reduce energy and power costs by 50% or more. Certification must be done by a licensed company that is authorized by the State. Additionally, a partial deduction of $00.60 can be taken if the building property does not meet a 50% energy and power cost reduction but meets the energy savings targets set by the Secretary. Although these tax deductions are for the property owner, the current 179D tax deductions allows for the deductions to be allocated to the person primarily responsible for the design of the building property if the property is owned by the federal, state, or local government or a political subdivision.

The New 179D Tax Deduction

The IRA 2022 brings about the new 179D tax deduction which applies to property placed in service beginning January 1, 2023. The new 179D tax deduction applies to the same types of property, but the deduction amounts, allocability and claim periods have changed. Under the new 179D tax deduction, a deduction of up to $5.00 per square may be available. Under the new 179D tax deduction, the minimum efficiency level needed to obtain a deduction is 25% and the maximum applicable efficiency is 50%. Under the new 179D tax deduction, the deduction amounts applicable are based on a sliding scale and a larger deduction can be obtained if certain labor standards are met by the building project. These labor standards relate to whether the prevailing wage is being paid to those installing the equipment and whether apprenticeship hiring requirements are met. If the labor standards are not met, the available deduction ranges from $00.50 for 25% efficiency to $1.00 for 50% efficiency. However, if the labor standards are met, the deduction ranges from $2.50 for 25% efficiency to $5.00 for 50% efficiency. In addition to the increased deductions, the new 179D tax deduction allows allocation not only from government entities, but also from tax-exempt or non-profit entities, and allows for commercial buildings to be certified.

Of additional note for the new 179D tax deduction is the new retrofit provisions. Under the retrofit provisions, the building’s pre-retrofit energy usage is used as the base to determine the efficiency percentage and where the deduction will land on the sliding scale. However, for a retrofit project to qualify, the building must be five years or older and there must be a qualified retrofit plan certified by a professional engineer or registered architect. Lastly, a retrofit deduction can only be claimed after the equipment is in service for one year and the project results in anticipated reductions in energy usage.

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