What the Inflation Reduction Act means for construction businesses
As the country’s environmental priorities shift to encourage investment in clean energy, construction businesses have the chance to take advantage of new or enhanced tax credits and electric vehicle incentives, among others, thanks to the Inflation Reduction Act of 2022. This legislation aims to promote clean technology and reduce greenhouse gas emissions. However, not all incentives make sense or are even available for every business, so be sure to check your eligibility and understand their impact in your decision-making and tax planning.
In addition, be aware that with so many industries shifting their focus to using renewable energy sources, construction firms will need to adapt to changing pricing structures and contracts incorporating greener technologies and materials. This shift towards a clean energy economy may also affect the supply chain and domestic manufacturing in the construction sector.
EV fleet incentive
More immediately, changes to the tax code are incentivizing the purchase of electric vehicles (EVs) and charging stations for businesses and individuals. The IRA electric vehicles provisions offer significant benefits for those considering fleet electrification. If you’ve been thinking of adding EVs to your fleet or trading up, you should be aware of the new provisions and determine if they align with your purchasing plans.
The IRA provides a maximum tax credit of $7,500 for qualified commercial clean vehicles acquired after December 31, 2022, with gross vehicle weight ratings of less than 14,000 pounds. This EV federal tax credit can significantly offset the initial costs of electric vehicle fleet conversion. For heavier vehicles, the maximum credit is $40,000. The vehicle must be manufactured for use on public streets, roads, and highways, or qualify as mobile machinery as defined in IRC Sec. 4053(8).
To be eligible for the EV subsidies, the vehicle must have a battery capacity of at least 15 kilowatt hours (7 kilowatt hours for vehicles weighing less than 14,000 pounds) and be charged by an external electricity source. This requirement aligns with the broader goals of promoting clean transportation and reducing reliance on fossil fuels.
Charging equipment credit
An EV charging installation could also earn your business a tax credit. The alternative fuel vehicle refueling property credit, §IRC 30C, which the IRA both expanded from its previous iteration and extended to December 31, 2032, provides incentives to individuals and businesses that install EV chargers. This credit is part of the Inflation Reduction Act charging stations initiative, aimed at expanding the charging infrastructure necessary for widespread EV adoption.
Growing attention to ESG issues may have you thinking more about these kinds of green investments. But there are caveats. Credits have precise and restrictive eligibility requirements and not all EV vehicle purchases will qualify. For instance, specific models like the Ford E-Transit may have different Ford EV incentives associated with them. It takes careful research to determine if such tax credits warrant the initial investment. Pursuit of the tax credits should not be the guiding principle for making an EV vehicle purchase for your commercial fleet. Instead, consider developing a comprehensive fleet electrification strategy that considers the total cost of ownership, including potential savings from reduced fuel and maintenance costs.
Accelerated deductions
What may be even more enticing for construction businesses under the IRA are the expanded energy-efficiency deductions under Sec. 179D and 45L. These deductions are part of the broader push towards clean technology and energy security in the construction industry.
Sec. 179D allows property owners to claim an immediate deduction for the cost of qualifying energy-efficient property related to both the new construction and renovation of existing buildings. Eligible designers and builders can also claim a section 179D tax deduction under a special rule for public property. Without Sec. 179D, such costs would need to be depreciated over 27.5 or 39 years (for residential and commercial property, respectively).
In this case, designers and builders that have enhanced the energy efficiency of a new or existing nonprofit or government-owned building can be allocated the deduction by the building owner. It is imperative that your architect or construction firm has a letter from the owner attesting to your firm’s role as a designer, not just an installer, in order to claim the deduction.
It is possible for more than one entity, say an architect and a construction firm, could share the designer designation and each would reap a portion of the benefits, but no more than 100% of the eligible deduction can be claimed in total.
The provision raises the maximum deduction value from the previous maximum of $1.80 per square foot to $5 per square foot (subject to an annual cost-of-living adjustment). However, to claim this increased maximum deduction, specified prevailing wage and apprenticeship requirements must be met. These requirements align with the IRA’s goals of promoting domestic manufacturing and creating jobs in the clean energy sector.
The benefits can be quite valuable. One construction firm was able to obtain deductions worth $7 million over three years for about 40 government construction projects across their state. This example demonstrates how the tax credits can significantly impact a company's bottom line while contributing to the broader goals of clean energy adoption and fleet decarbonization.
Breakdown of $7 million in 179D deductions
| Total square footage | HVAC deduction/sq. ft. | Lighting area sq.footage | Lighting deduction/sq. ft. | Total qualified deductions $ | |
|---|---|---|---|---|---|
| Year 1 | 1,550,000 | $ 1.80 | 2,790,000 | ||
| 100,000 | $ 0.60 | 60,000 | |||
| 5,000 | $ 0.60 | 3,000 | |||
| Year 2 | 380,000 | $ 1.80 | 684,000 | ||
| 350,000 | $ 0.60 | 210,000 | |||
| 100,000 | $ 0.53 | 53,000 | |||
| 125,000 | $ 0.60 |
75,000 | |||
| Year 3 | 1,325,000 | $ 1.80 |
2,385,000 | ||
| 900,000 | $ 0.60 | 540,000 | |||
| 480,000 | $ 0.60 |
288,000 | |||
| 12,000 | $ 0.45 | 5,400 | |||
| Total | 7,093,400 |
With such generous tax benefits available, some construction firms may consider passing some of the benefits on to clients. Adjusting your contract price because of the incentive could factor into your marketing and give you a competitive edge when bidding for jobs. This approach could be particularly effective for projects involving zero-emissions vehicles or other clean energy initiatives.
Similarly, the IRA-expanded Sec. 45L tax credits are available for eligible contractors for the construction or rehabilitation of energy-efficient residential properties that are leased or sold. Meeting the prevailing wage requirements also increases the available tax credit. These credits, along with the advanced manufacturing production credit, are part of the IRA’s strategy to incentivize clean energy adoption across various sectors.
One of the main changes the IRA makes to federal tax law is reinstating a corporate alternative minimum tax (AMT).This new AMT is 15% of a company’s adjusted financial statement income, but it only affects C corporations with financial statement income of over $1 billion over the prior three years. Hence, it only comes into play for the largest corporations and is not applicable to the vast majority of construction firms.
Because additional guidance on federal tax credits and deductions may be forthcoming, it pays to stay attuned to these and future changes and how they may affect planning and decisions at your organization. In committing to a greener future for your business, make sure you know which incentives are available and which are right for your company. This may include exploring opportunities in battery recycling, onshoring of critical minerals, or participating in clean ports programs.
How Wipfli can help
Our experienced team is staying on top of all the rules related to the Inflation Reduction Act and their implementation. We can help you take advantage of the new and expanded incentives supporting the shift to clean energy that make sense for your business. We bring specialized tax knowledge to help guide your decision-making to support your business and changing environmental policies, including strategies for supply chain diversification and adapting to the EV transition. Learn more about our tax services supporting the construction and real estate industries.
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