How to Leverage Energy Efficiency Tax Deductions for Construction Projects

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Have you recently been working on energy-efficient construction projects? If so, you may be able to leverage new construction tax credits that offer deductions based on energy efficiency. These tax credits offer an excellent way to ultimately save money when encountering unexpected cost management issues. 

This guide explores how the new construction tax credits 179D and 45L work, their qualifications and how to maximize those deductions. 

Challenges of Construction Cost Management 

Planning innovative construction projects requires careful planning to avoid challenges like cost control issues, budget restraints and tight schedules. For successful project execution, it’s essential to understand construction cost management challenges and how to combat them.

Knowing how to manage construction costs effectively can help align cost prediction, analysis and control with delivering the construction project. Common issues might include: 

  • Uncertain project scopes: It is important for companies to confirm that the project scope reflects all necessary tasks. This ensures that no small or crucial duties are overlooked, which could cause budget overruns later on. 
  • Fluctuating material costs: The construction material market may have fluctuating prices due to geopolitical issues and supply chain disruptions, making prediction software a valuable asset to anticipate more accurate material expenses. 
  • Inaccurate initial cost estimations: Companies may make an inaccurate cost estimation when they do not accurately assess the cost associated with every aspect of a construction project from start to finish. This makes it important to be informed about even the smallest things that could affect cost estimates, such as site accessibility issues and soil conditions. 
  • Unforeseen environmental conditions: These situations can include adverse weather conditions, soil contamination, hazardous material or undetected underground structures. They may disrupt project schedules or trigger additional expenses, making it essential to anticipate these in advance. 

Section 179D and 45L Tax Credits as a Solution

While there are valuable solutions you can use to anticipate more accurate costs, you can also leverage special incentives to increase your return on investment — Section 179D and Section 45L tax credits. 

These credits allow you to reduce tax payments based on energy-efficient features included in the construction building. To reap their benefits, you’ll need to ensure you follow the correct procedures and meet all the necessary requirements.

What Is the 179D Tax Incentive? 

The 179D tax deductions are a per-square-foot taxable income deduction for commercial buildings using energy-efficient constructions and designs. The deduction is available to the owners of qualified commercial buildings. If the owner is a specified tax-exempt entity, the designer becomes eligible for the credit if all other criteria are met. These may include nonprofits or government entities, such as the following:

  • Community centers 
  • Private or public schools 
  • Airports 
  • Libraries 
  • Universities 
  • Community colleges 
  • Treatment centers 
  • Hospitals 
  • City halls 

The new construction tax credits allow properties in service after January 1, 2023, to leverage a maximum deduction value of $1.00 per square foot, depending on the energy efficiency level. Properties in service before January 1, 2023, may earn deductions up to $1.80 per square foot (indexed for inflation annually) if the improvements to HVAC systems, lighting and building envelopes meet the right requirements. 

You may need certification by a qualified third party to verify your compliance with energy savings criteria. Your improvements should meet the standards set by the American Society of Heating, Refrigerating and Air Conditioning Engineers (ASHRAE). 

The IRS also states that building owners and designers should reduce power and energy costs by at least 25%. 

What Is the 45L Tax Incentive? 

45L credit requires builders to get certification

This energy efficiency credit is a per-unit incentive that rewards developers for meeting specific energy efficiency benchmarks. For homes acquired in or after 2023, this may help eligible developers claim a $500-$5,000 credit per qualified dwelling unit when meeting energy efficiency standards. These may include requirements regarding ventilation, heating, cooling and building envelope components. Some properties that may qualify include: 

  • Single-family homes.
  • Multifamily apartment buildings.
  • Condos.
  • Townhome developments.
  • Assisted living facilities.
  • Residential buildings with three stories or less.

Similar to the 179D tax incentive, the 45L credit requires builders to get certification from a qualified third party. This may be a licensed engineer or contractor who can perform tests to confirm whether the property meets energy-efficiency requirements. The building should meet ENERGY STAR® guidelines to qualify for the $2,500 tax threshold. To meet the $5,000 threshold, it should meet Zero Energy Ready Home requirements. 

How to Maximize 179D Credit Deductions 

There are numerous factors to consider when maximizing your 179D energy-efficient tax deductions: 

  • Timing: Designers should review their backlog of work as soon as possible to receive 179D deductions. This is crucial since many consultants on the project may also qualify for the incentive. 
  • Collaboration: Collaborate with engineers and architects from the beginning to ensure you consider all the necessary energy efficiency standards. 
  • Lighting: Aim to incorporate energy-efficient LED lighting fixtures throughout the building. LED lights can be a great option because they reduce energy consumption while lasting longer than traditional lighting. Make sure it has the correct lighting control systems for efficient use. Other energy-saving lighting solutions include daylighting controls and occupancy sensors, which only use energy based on the occupancy and natural light availability of the area. 
  • HVAC systems: Choose energy-efficient HVAC systems and equipment with various features. With building envelope and HVAC system efficiency, the overall energy performance of the building is what’s important. This makes it valuable to install high-efficiency equipment. This might include heat pumps or variable refrigerant flow systems. You may improve the building envelope by sealing air leaks, enhancing insulation and upgrading doors and windows to minimize heat transfer.
  • Design features: You may want to implement air sealing measures and use high-performance insulation materials to support qualification.

How to Maximize 45L Tax Credits 

Maximizing 45L credits is typically easier than 179D credits. Make sure your certification includes on-site testing and computer modeling that assesses the energy efficiency of the dwelling units. You’ll also want to review all projects completed in the past three years. If any of them meet the qualification requirements, amend those tax credits. 

If you’re planning to leverage this credit, it’s important to consider your budget and associated costs. Carefully plan which energy-saving designs and technologies you can afford and will implement. Check whether the potential return on investment through tax credits is worth the amount the project costs altogether.

Why Trust Polston Tax With Your Company’s Tax Planning?

Do you believe you qualify for a 179D or 45L tax deduction? Polston Tax is a full-service tax and accounting firm that offers advanced tax planning and tax resolution services. Our professionals have extensive knowledge of the latest tax laws and tax codes to assist companies in the construction and oil and gas industry where needed. 

Rather than assigning one professional to your company, we take a team approach to ensure you have a crew of supportive professionals behind you. This team may consist of a case manager, tax attorney, tax preparer and accountant. We take the time to understand your business’s structure and situation. Doing so allows us to create tailored tax strategies with your company’s particular tax needs in mind. 

Plan Ahead With Polston Tax

Our knowledgeable tax professionals at Polston Tax are ready to assist you in improving your tax planning and maximizing tax savings. Even if you’re unsure whether you qualify, we can help you understand whether you do and how to maximize tax deductions where possible. All tax strategies and plan advice we offer are customized to your unique company and situation.

For assistance claiming 179D and 45L energy credits, contact our knowledgeable professionals for a free consultation today.

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