The 179D Energy Efficient Commercial Building Deduction remains a valuable incentive for energy efficient buildings. With recent updates allowing for higher deduction rates when prevailing wage and apprenticeship standards are met. Key exceptions and guidelines help building owners and designers maximize these deductions.
For an in-depth discussion of the prevailing wage and apprenticeship requirements, please read the following article [click here].
Requirements for Maximum Deduction
For projects aiming to maximize the 179D deduction, compliance with prevailing wage and apprenticeship standards is necessary. When these standards are met:
- – In 2024, projects achieving 25% energy savings qualify for a base deduction rate of $2.83 per square foot vs $2.68 per square foot in 2023.
- – For each additional 1% in energy savings beyond 25%, the deduction increases by $0.11 per square foot, up to a maximum of $5.65 per square foot in 2024 vs $5.36 per square foot in 2023.
Even with full qualification, the deduction caps at the cost of the property, ensuring it aligns with project expenses.
Grandfather Clause: Exceptions to the Prevailing Wage and Apprenticeship Standards
The grandfather clause allows certain projects to bypass the prevailing wage and apprenticeship requirements under specific conditions:
- – Projects That Began Construction Before January 29, 2023: The grandfather clause allows projects started before this date to follow previous standards, bypassing new requirements. This allows projects in progress at the time of the rule change to continue as planned, without adopting the prevailing wage or apprenticeship standards.
- – Small-Scale Facilities: This condition is not applicable to Section 179D. However, it’s worth mentioning that facilities with a power output of less than 1 megawatt do not need to meet the prevailing wage and apprenticeship requirements. This exclusion primarily relates to alternative clean energy incentives such as the Clean Electricity Investment Credit.
Documenting Eligibility for Grandfather Clause Exemptions
Projects claiming a grandfather clause exemption must keep accurate records to prove compliance. Moreover, the IRS requires taxpayers to have sufficient documentation to prove that their project meets the exemption criteria. Key forms of documentation include:
- – Contracts and Permits: Agreements, permits, and approvals from before January 29, 2023, serve as evidence of construction start. This confirms work began before the new standards took effect.
- – Invoices and Payment Records: Payment records, like invoices and transactions, verify the project timeline. This helps support compliance claims.
- – Project Timelines and Progress Reports: Construction records help verify ongoing work. This ensures compliance with the safe harbor rule’s continuous efforts requirement.
Safe Harbor Rule: Meeting the Five Percent Cost Requirement
The IRS also establishes a “Five Percent Safe Harbor” rule to help determine when a project’s construction qualifies under the tax code. For a project to qualify:
- Five Percent Cost Requirement: The taxpayer must pay or incur at least 5% of the total project cost.
- Continuous Efforts: The taxpayer must maintain ongoing efforts toward completing the project.
For contractor-led projects, costs under a binding agreement count as taxpayer expenses. This provision helps taxpayers meet the 5% threshold more easily, especially on projects that rely on third-party work.
Conclusion
The 179D deduction provides valuable incentives for energy-efficient projects, with higher benefits for those meeting prevailing wage and apprenticeship standards. Understanding the grandfather clause and maintaining proper documentation is key to maximizing these deductions.
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