Developments on Tax Incentives Available to Construction & Engineering Businesses for Tax Year 2023

Alex Theobald

The 179D Energy Efficient Commercial Buildings Deduction has been around for several years, however changes stemming from the Inflation Reduction Act have greatly expanded the potential for tax savings related to this deduction.  The changes apply to 2023 and forward.  One of the key changes of the expanded deduction is that starting in 2023 the deduction increases to a maximum of $5.36 per square foot of qualifying space from the 2022 amount of $1.88 per square foot, if qualifying parameters are met.  Energy efficient improvements can include construction or improvements to the building envelope, HVAC, or interior lighting systems.

If you own commercial buildings, the deduction reduces the depreciable basis of the asset and can be claimed with the 2023 tax return.

Additionally, in 2022 and prior years architecture and engineering firms that designed government-owned buildings were able to benefit from a deduction, but in year 2023 and forward this opportunity has been expanded as well.  In 2023 and forward, the opportunity to claim the deduction for architecture, engineering, and design-build contractors has been expanded to include not only government-owned buildings, but now also includes tax-exempt entities and tribal organizations.  The tax-exempt entities could include charitable organizations, churches, schools, hospitals, private foundations, political organizations, and other non-profits located in the United States.  Since these tax-exempt owners cannot benefit from the deduction, they are able to allocate the 179D incentive to the designers of the energy-efficient improvements.

It should be noted that the designer must secure an allocation letter from the tax-exempt entity outlining the transfer of the deduction.  The benefit is of great advantage to design firms because they do not have a depreciable basis in the property, and it becomes a permanent tax savings.  The deduction can be claimed retroactively; however, the taxpayer must amend the tax return to do so.

Further, a tax bill that could return full deductibility of U.S. research expenses has overwhelmingly passed in the House with bipartisan support.  Businesses that have suffered under the recent changes to Section 174 could see tremendous relief. We will continue to monitor the progress of this legislation.

For more information on these developments, contact us.


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