Denver Tax PlanningAt the end of 2022, President Biden signed the Inflation Reduction Act into law, providing additional incentives for businesses investing in clean energy. New incentives were designed to benefit families and individuals, including the New Clean Vehicle and Used Clean Vehicle Tax credits and Home Energy Credits. The legislation also included new and expanded incentives for companies for clean fuel and electricity production, biofuel incentives, and enhancements to the Section 179d Deduction. The deduction has long been popular with the real estate and construction industry and has been significantly enhanced. For example, the deduction amount has been increased from $1.88 to $5.00 per square foot. A provision also allows the incentive to be allocated to designers under certain circumstances. To help clients, prospects, and others, Hanson & Co has summarized the key details below.

What is the 179D tax deduction?

The Section 179D tax incentive, also known as the Energy Efficient Commercial Building Deduction, was originally created as part of the Energy Policy Act of 2005. The credit has clear benefits for engineers, contractors, and architects who design buildings with energy-efficient features in mind. It was created to encourage the design and construction of energy-efficient commercial buildings. If a building meets certain energy-efficient standards, businesses will be eligible to claim deductions on their taxes.

What do businesses need to do to meet 179D requirements?

Owners, engineers, designers, and architects who work on commercial buildings can apply for the 179D tax deduction. For a building to qualify under the credit, energy consumption needs to be reduced by at least 25% and be in alignment with the American Society of Heating, Refrigerating and Air-Conditions Engineers (ASHRAE) 90.1-2007 reference building.

For projects that meet specific wage requirements, a bonus deduction equal to five times the base amount is also available.

What has changed?

A relatively new extension of Section 179D allows commercial building designers to claim the credit for tax-exempt organizations. This includes religious groups, tribal organizations, and non-profit schools, universities, and other organizations.

There have also been other enhancements to 179D to increase the maximum amount of the deduction. Instead of $1.88 per square foot, buildings that have been placed in service on or after 2023 can receive a deduction of $5.00 or more per square foot. The deduction also resets and can be taken every four years for designers or three years for building owners, as long as applicable updates have been made to the building in the form of renovations or additions.

Prevailing Wage and Apprenticeship Requirements

As of 2024, the standard deduction is $0.57 per square foot for a 25% reduction in energy consumption, with each additional percentage point reduction worth $0.02 per square foot, up to $1.13 per square foot for a reduction of 50% or more. Businesses can receive much higher deductions, however, when they meet prevailing wage and apprenticeship requirements – $2.83 per square foot deduction with a 25% reduction, up to $5.65 per square foot with 50% or higher reductions in energy consumption.

To meet the prevailing wage requirements, the mechanics and laborers employed by building owners, designers, contractors, or subcontractors working on the property must be paid at least the prevailing wage for similar construction jobs in the area. The Secretary of Labor determines the amount. These requirements ensure that workers involved in energy-efficient improvements are paid fairly and encourage apprenticeship programs in the construction field. The reward can be significant for businesses looking for a higher incentive amount.

How can 179D benefit Colorado businesses?

The 179D credit benefits both architect and engineering (A&E) firms and small business owners looking to move into new or renovated buildings. When A&E firms leverage the 179D tax credit, they can design energy-efficient buildings that cost less, transferring the savings to the businesses that will reside in the building.

In addition to the tax savings, Colorado companies can differentiate themselves by employing more sustainable building practices and using their energy-efficient designs as selling points.

Contact Us

Many Denver companies can benefit by taking advantage of the Section 179D deduction. Since the details are complicated, it’s essential to consult with a qualified tax advisor to evaluate your situation and determine how to proceed. If you have questions about the information outlined above, or need assistance with another tax issue, Hanson & Co can help. For additional information, call 303-388-1010 or fill out the form below. We look forward to speaking with you soon.