Navigating the Expanded Eligibility Criteria for 179D Deductions

Navigating the Expanded Eligibility Criteria for §179D Deductions

Has your company engaged in construction or renovated a building that has reduced energy use or energy costs by at least 25%? Has your architecture or engineering firm been involved in such a project? If so, you may qualify for the Section §179D tax deduction, now worth up to $5.65 per square foot. 

Furthermore, with passage of the “Inflation Reduction Act” of 2022, the §179D tax deduction is now available to more businesses, worth more than ever, and offers two tracks to savings. Any business that has been involved with upgrading a property should investigate whether they qualify for the 179D tax deduction. 

Changes to the Section 179D tax deduction

Lower minimum energy savings to qualify  

Starting tax year 2023, the minimum energy cost savings were slashed in half to 25%. With that change, qualifying for the deduction shifted from onerous to manageable for many businesses. 

Energy cost savings or energy use reduction

Additionally, the benchmark of reduced energy cost was modified to add reduced energy usage, regardless of cost savings. This gives applicants for the deduction an alternative pathway to qualifying. It requires that the business applying for the deduction establish a baseline for energy usage and then invite a final certification to confirm the reduction in energy usage.

The deduction provides for an escalating deduction value of $0.02 per square foot for every percentage point of reduction beyond 25%. In other words, a business shrinking its energy load by 35% would earn a deduction $0.20 per square foot greater than the minimum. For a 10,000 square-foot building, that amounts to an additional $2,000 deduction. 

Increased tax savings

The value of the tax deduction also increased through a complicated formula that boosted the deduction for a 50% energy reduction from $0.60 per square foot to $1.13 per square foot, and the maximum deduction from $1.88 per square foot to $5.65 per square foot.

For a single 10,000 square-foot building, the deduction is worth between $11,300 and $56,500, depending upon a variety of complex variables. 

Prevailing wage deduction

The updated rules created a supercharged deduction for businesses that reduce their energy footprint and meet prevailing wage and apprenticeship hour requirements.

Prevailing wage rules introduce a whole new level of complication into the process, requiring laborers, mechanics, contractors and subcontractors employed by the business applying for the deduction to be compensated at minimum hourly rates established by the Secretary of Labor as “prevailing” in the construction industry localized to the region in which the facility is located. Apprenticeship rules require that a specific number of project hours be completed by apprentices. 

Expanded qualifying entities to architects and engineers

The new rules extend beyond building owners to architects and engineers who are primarily responsible for designing the property applying for the deduction. This has broadened the savings to a whole new group of professionals and in turn encouraged the construction of more sustainable properties by reducing their effective cost. These changes also affect Real Estate Investment Trusts (REITs). 

No longer a one-time benefit

The Section 179D tax deduction may be claimed for additional upgrades to properties even if that property had qualified for the deduction previously, after a three-year waiting period. This new provision encourages property owners to continue their efforts to improve the sustainability of their properties for as long as they own them. 

This serves as a broad outline of the new Section 179D tax deduction. Its many provisions are complex and the documentation is significant, so any business hoping to claim the deduction needs a tax professional to guide them through their application. National Tax Group has helped hundreds of businesses claim the Section 179D tax deduction. Schedule a risk-free consultation to determine if your business can benefit from pursuing this improved tax deduction.