A Major Boost for Energy Efficient Commercial Buildings

Despite the existence of a federal income tax deduction for energy efficient commercial buildings since 2005, the Inflation Reduction Act of 2022 significantly enhanced these federal income tax benefits. This legislation offered major incentives to adopt energy-efficient building practices.

Starting in 2023, this major boost includes:

1. A deduction amount potentially increased to $5 per square foot (up from $1.80 per square foot) IF prevailing wage and apprenticeship standards are met and the building was 50% or more energy efficient.
2. If the building was between 25% and 50% more energy efficient, a sliding scale delivers a deduction between $2.50 and $5 per square foot IF prevailing wage and apprenticeship standards are met.
3. Primary designers of non-profits can now capture this deduction instead of just being eligible for government owned buildings (previously limited to either the owner of the building or the primary designer of the building only if the building was owned by a governmental entity).

What are prevailing wage and apprenticeship requirements for purposes of this major deduction boost?  Generally, prevailing wage requires that any laborers and mechanics employed directly by taxpayer or indirectly by contractors and subcontractors are paid at least prevailing wages (as determined by the U.S. Dept. of Labor) for the specified type of construction in the geographic area of the building.  Apprenticeship requirements include three separate tests that must be satisfied with respect to employing apprentices, which include the (i) labor hour requirement; (ii) the ratio requirement and (iii) the participation requirement.

It is no secret that the prevailing wage and apprenticeship requirements are raising the bar on attaining this deduction. Private developers and builders are not able to adjust to this change overnight. For projects constructed by the government, the wage standard was likely already required; however, apprenticeship requirements will need to be met.

Exemption from Prevailing Wage and Apprenticeship Requirements:

Construction projects take many months to a few years to complete. To allow for a transition period, if the construction project commenced prior to 1/30/2023, a taxpayer may be able take the higher deductions WITHOUT meeting the prevailing wage and apprenticeship requirements. These buildings are likely wrapping up construction in 2024 and perhaps some will complete in 2025.

If your project is lucky enough to fall into this exemption, do not miss out. Even if you do not think your project had a focus on energy efficiency, you may qualify for at least part of this deduction. Contact us to let Weaver’s Fixed Asset Advisory team help determine your benefit today.

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