The IRS released final regulations and related guidance regarding bonus credits and deductions for taxpayers that satisfy prevailing wage and apprenticeship (PWA) requirements. The regulations apply to certain “green” energy tax provisions, such as the §179D Energy Efficient Commercial Building Deduction and the §45L Energy Efficient Home Credit, as well as others like the §48 Energy Investment Credit, which were modified or enacted by the Inflation Reduction Act of 2022.
In addition to these finalized regulations, the IRS also issued or updated the following related guidance that summarize the final regulations:
Publication 5983, IRA Prevailing Wage and Apprenticeship Requirements Fact Sheet
Publication 5855, IRA Prevailing Wage and Registered Apprenticeship Overview
Prevailing wage and apprenticeship frequently asked questions (FAQs)
Background
Beginning 2023, the Inflation Reduction Act of 2022 (IRA) heavily modified the §179D Energy Efficient Commercial Building Deduction (§179D Deduction) and the §45L Energy Efficient Home Credit (§45L Credit), among other valuable “green” income tax incentives.
To maximize the §179D Deduction on commercial buildings, taxpayers need to meet or be exempted from PWA requirements. If met, the amount of the deduction increases five-fold, from $.50 – $1.00 to $2.50 – $5.00 per square foot when prevailing wage requirements are satisfied. Similarly for multifamily homes, the maximum §45L Credit quintuples from $500 – $1,000 per residence to $2,500 – $5,000 per home depending on qualification level.
*The 179D Deduction receives annual inflationary adjustments such that the maximum deductions for 2023 and 2024 is $5.36 and $5.65, respectively.
Observation
Single-family homes, which includes townhomes, as well as manufactured homes under the IRA rules are not required to meet prevailing wage requirements to obtain the higher $2,500 to $5,000 §45L Credit.
Prevailing wage requirements heavily vary by state and county, such that some states have very high rates whereas they are virtually non-existent in others. Prevailing wage rates by state, county, and construction type can be viewed at https://www.sam.gov. Additional information on the apprenticeship system, which applies to the §179D Deduction and not to the §45L Credit, can be found at https://www.apprenticeship.gov.
The Final PWA Regulations
The regulations as well as the aforementioned publications and FAQ explain how taxpayers can meet or be exempted from these requirements as well as the documentation requirements.
For example, the regulations explain that a taxpayer is eligible for the increased $2.50-$5.00 §179D Deduction without meeting the PWA requirements if the beginning of construction occurred prior to January 29, 2023. To determine the beginning of construction, the regulations provide the two methods: (1) Physical Work Test and (2) Five-Percent Safe Harbor.
Under the Physical Work Test, the taxpayer needs to show that physical work of a significant nature has begun. Physical work of significant nature does not include preliminary activities, even if the cost of those preliminary activities is properly included in the depreciable basis of the facility. For purposes of the Physical Work Test, preliminary activities include, but are not limited to, planning or designing, securing financing, exploring, researching, obtaining permits, licensing, conducting surveys, environmental and engineering studies, or clearing a site. Under the Five-Percent Safe Harbor, the taxpayer needs to show that at least 5% of the project’s costs have been incurred. Here, design fees can be viewed as project costs.
Talk to the Experts
ICS Tax provides innovative tax planning strategies and specializes in the §179D Deduction and the §45L Credit, benefiting those in the construction and real estate industry. Together with you and your tax advisors, we can identify credits and incentives that will reduce tax liabilities and increase profitability. Our nationwide experts are ready to help. Contact us for a consultation
About the author
Alexander Bagne
President · JD, CPA, MBA, CCSP
Alex is the President of ICS Tax, LLC (ICS). His expertise includes fixed asset reviews, cost segregation, the 179D and 45L energy efficiency incentives, accounting methods, research tax credits, and IC-DISC export incentives. Prior to ICS, Alex worked for a decade with several Big Four firms, including Ernst & Young, Deloitte Tax, and PricewaterhouseCoopers. His specialized planning ideas have saved his clients millions in tax dollars. He has given Continuing Professional Education on a variety of tax planning ideas throughout the country. He is published in the AICPA's Tax Adviser magazine and Accounting Today.
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