The majority of the incentives and deductions in the recently passed Inflation Reduction Act go to building owners, but there is one area where contractors may benefit. In fact, the Act allows construction firms to deduct up to $5 per square foot for certain projects. Though, there’s a catch.
The Requirements
In order to be eligible for the tax deductions available to contractors, one must design or install qualified energy-efficient systems. Moreover, there is an opportunity for additional deductions if the contractor also meets prevailing wage and apprenticeship requirements. These deductions come as the result of changes made to the 179D energy efficiency deduction, dating back to 2006. The change also allows lighting, HVAC, and building envelope designers working on structures owned by other tax-exempt entities to qualify.
The Catch
Apart from the fact that contractors must be working on energy-efficient systems and/or meeting wage requirements, they also have to negotiate the deduction ahead of time. In order to receive the deduction, the contractor must ensure the organization assigns the deduction to them ahead of time.
The Deduction
The deduction amount varies depending on the energy improvement percentage. Before, only improvements of 50% or greater were eligible. Now, eligible improvements begin at 25% and increase 2 cents per square foot for each percent above 25%, up to $1 per square foot. Those contractors meeting prevailing wages also receive varying deductions starting at $2.50 per square foot up to $5 depending on the percent improvement, starting at 25%.
Considerations
Since receiving the additional deduction depends on meeting wage requirements, there is an important consideration to keep in mind: weigh the value of the tax deduction and increasing wage expenses. It is important for contractors to determine which option makes the most sense financially and go from there.