Among the many changes in the recently-passed Inflation Reduction Act of 2022 (IRA) are new requirements related to contractors and construction firms.

The minimum annual savings in energy costs required to receive the Section 179D Energy Efficient Commercial Building Deduction has been lowered from 50% to 25%. In addition, owners who construct new or renovate existing energy-efficient buildings may receive a tax deduction of up to $1.88 per square foot. This lower threshold will go into effect for property placed in service on or after January 1, 2023.

The Act also provides higher deductions for owners who meet prevailing wage and apprenticeship requirements. If these requirements are met and the building achieves a 25 percent reduction in energy costs, the deduction rises to $2.50 per square foot. The deduction increases by $0.10 for each additional percentage of reduction, up to a maximum deduction of $5.00 per square foot.

The IRA removes the lifetime limit on the Section 179D deduction beginning in 2023. Contractors and firms can now take the deduction every three tax years if additional cost savings are realized as a result of new energy-efficiency improvements. Also, both public and tax-exempt organizations (e.g., religious institutions, private schools and hospitals, and museums) can now allocate the Section 179D deduction to designers.

A new retrofit program provides an election for a new alternative deduction for energy-efficiency retrofits to reduce the intensity of energy use rather than total annual energy costs.

Contact Dembo Jones to explore how you can take advantage of these – and other changes – in the Inflation Reduction Act.