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Congress Proposes Major Expansion of Current Tax Benefits for Architects, Engineers and Contractors

While business owners may be understandably concerned about the possible tax increases coming from D.C., there is some decidedly good news on the tax front for architects, engineers and construction companies.

The Senate Finance Committee in a recent markup of the “Clean Energy for America Act” made significant changes and expansions to Section 179D – (Energy Efficient Commercial Buildings). As many of you know, this code section has been of tremendous benefit to designers working on federal, state and local government buildings (including schools and colleges).

In addition, the Finance Committee essentially replaced the old credit under Section 45L for energy efficient residential buildings with a far more robust credit for contractors. The Clean Energy for America Act was reported to the Senate floor, and these two provisions are currently expected to be included (at least in part) in the infrastructure bill that the administration is championing.

Commercial Buildings – 179D

The Chairman’s bill raises the deduction under 179D from $1.80 per square foot to $2.50 per square foot, up to $5.00 per square foot based on the amount of energy savings.

A key change is that buildings owned by tax-exempt entities (such as charities, private schools and colleges, nonprofit hospitals, etc.) and Indian tribes would also qualify for Section 179D (and provide for the allocation of the deduction to the designer). REITs also will now be able to benefit from 179D.

In addition, the provision reduces from 50 percent to 25 percent the amount by which the building must be designed to reduce the relevant building’s total annual energy and power costs.

Chairman Wyden (D-OR) also accepted as part of his manager’s amendment changes advocated by Senator Cardin (D-MD). This will ensure that multifamily housing structures may qualify even if they do not fall within the scope of Reference Standard 90.1—ending the requirement that they be four stories or greater.

Further, Senator Cardin’s amendment will make it markedly easier for retrofit buildings to qualify – allowing taxpayers to use Energy Star Portfolio Manager benchmarks rather than Reference Standard 90.1 for certification of a retrofit plan for 179D.

Finally, the provision has a wage and workforce requirement. The taxpayer must ensure that workers are paid prevailing wage rates and have a qualified apprenticeship program. Due to the tight rules for reconciliation bills, this last provision is expected to be in for rough sledding.

These provisions are effective for property placed in service after December 31, 2021.

Residential – 45L

For contractors of energy-efficient dwellings/homes, a credit of $2,500 or $5,000 (depending on energy efficiency) is applicable for each energy-efficient home constructed and sold in that year. The credit is also available for manufactured home producers.

The 2,500 credit is for dwellings that meet the national program requirements under the Energy Star Residential New Construction Program in effect on January 1 of the year in which construction of the housing unit begins.

The $5,000 credit is for new dwelling units that are certified as satisfying the requirements for new residential construction under the Zero Energy Ready Home program as in effect on January 1 of the year in which construction began.

The program does not include substantial reconstruction or rehab of an existing structure.

Similar to Section 179D, the statute requires that the certification of energy efficiency be made by a third party who is accredited by a certification program approved by the Secretary of Treasury.

Finally, the provision has a requirement that workers be paid prevailing wages—similar to the provision added in amending Section 179D, and similarly controversial with a very uncertain outlook.

Effective date as of now it is for residencies substantially completed after December 31, 2021.

Section 199A

I know many architects, engineers and construction companies are big fans of Section 199A (allowing the 20% deduction of income for certain businesses)—in big news the Biden administration has not put forward any changes to Section 199A in the recently released Treasury “Green book.”

While not completely out of the woods, this “dog that didn’t bark” is a positive development for those benefitting from Section 199A.

In conclusion, there is a good expectation that these expansions of 179D and 45L will become law (minus the labor requirements).

The overall bill was passed by the Senate Finance Committee, and it is expected that these provisions will be included as part of the major infrastructure bill that is currently being negotiated. It may take all summer and into the fall before the infrastructure bill is passed by Congress and signed into law, but the outlook is currently promising that action will be taken on this top priority of the Biden administration.

Architects, engineers and construction companies should be making plans now in anticipation of these new provisions going into effect for buildings placed into service (or substantially completed in the case of residencies) after December 31, 2021.

About the Author

Dean Zerbe is alliantgroup’s National Managing Director based in the firm’s Washington, D.C. office. Prior to joining alliantgroup, Zerbe was Senior Counsel and Tax Counsel to the U.S. Senate Committee on Finance. He worked closely with then-Chairman of the Finance Committee, Senator Charles Grassley, on tax legislation. During his tenure on the Finance Committee, Zerbe was intimately involved with nearly every major piece of tax legislation that was signed into law, including the 2001 and 2003 tax reconciliation bills, the JOBS bill in 2004 (corporate tax reform) and the Pension Protection Act.