The Inflation Reduction Act (IRA) passed in August of 2022 significantly expands the tax savings available to Colorado real estate and construction companies. The purpose is to help the Federal Reserve fight inflation by making investments to lower prescription drugs, healthcare insurance, and energy costs to create new opportunities. The legislation includes dozens of tax incentives designed to reward individuals and organizations for energy-efficient investments. Perhaps one of the most compelling changes was the expansion of the Section 179d deduction, formally known as the Energy Efficient Commercial Building Property Deduction. There were several updates including an increased deduction amount, the inclusion of nonprofits, and a deduction reset. To help clients, prospects, and others, Whipplewood CPAs has provided a summary of the key details below.
What is Section 179d?
It is a federal tax deduction that permits eligible businesses to immediately deduct the cost of energy-efficient property installed in a commercial building. It was originally introduced as part of the 2005 Energy Policy Act, and is set to $1.80 per square foot of space. Eligible energy-efficient updates made to HVAC, building lighting, and building envelope updates are eligible.
2023 Section 179d Updates
- Maximum Deduction Amount Increased – The IRA has sharply increased the deduction amount to a maximum of $5 per square foot. Under new regulations, a deduction between $2.50 and $5.00 per square foot is available on projects that meet prevailing wage and apprenticeship standards. The deduction is drastically reduced to $.50 – $1.00 per square foot for all other projects. It is important to note the actual deduction amount is also determined by the amount of energy efficiency achieved.
- Expanded Inclusion – The IRS also expanded the types of entities which can claim the deduction to include nonprofits and tribal governments. In other words, places of worship, museums, private schools, and nonprofit hospitals are now eligible. Designers of the systems used in these buildings can now be allowed to claim the deduction for eligible projects.
- Deduction Reset – Under prior regulations, the maximum deduction can only be taken over the life of the building. The IRA changed the maximum deduction to now be available every three years on commercial buildings, and every four years on nonprofit and tribal government buildings.
These changes create an increased savings opportunity for many Denver real estate and construction companies. In fact, the upgraded deduction means faster benefit realization and a greater ROI for building owners. The increased tax savings not only opens the door to increased cash flow but will impact tax planning in 2023 and beyond.
Beyond this, these costs are eligible for bonus depreciation meaning that 80% of the cost of the project could be immediately deducted. Since there is currently a phase-out of bonus depreciation there is a lesser amount available each year. Starting in 2024 only 60% is available, 40% in 2025, and 20% in 2026. Due to this, the ability to expense costs instead of capitalizing is becoming more valuable each year.
The Inflation Reduction Act has made important changes to the Section 179d deduction. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Whipplewood CPAs can help. For additional information call 303-989-7600 or click here to contact us. We look forward to speaking with you soon.