The U.S. Department of the Treasury and the Internal Revenue Service have begun developing guidance to implement the range of tax provisions that were included in the Inflation Reduction Act (IRA), which was signed into law in August 2022.
A key provision of interest to ACEC members is the Section 179D energy-efficient commercial buildings tax deduction. The IRA modified Section 179D so that the deduction ranges from $0.50 per square foot to $5.00 per square foot, depending on whether certain energy efficiency, prevailing wage, and apprenticeship targets are met.
Under the IRA, both governmental and tax-exempt entities can now allocate the deduction to the primary designer of the energy-efficient systems. The agencies asked stakeholders to comment on how to identify the designer, and ACEC pointed to the system developed by the General Services Administration (GSA) for allocating the deduction. The GSA requires any contractor seeking allocation of the Section 179D deduction to certify in writing that they have consulted with all other contractors on the project. This method prevents the first contractor seeking the deduction from receiving it in place of designers who should qualify for it.
ACEC also raised the problem of clients and their third-party brokers requiring payment in exchange for allocation of the deduction and asked the Treasury to revisit the chief counsel decision that makes it difficult for engineering firms organized as S corporations to claim the Section 179D deduction.
The Biden administration’s proposed rule, the Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk, would require major federal contractors to disclose their greenhouse gas emissions. It would also require them to set science-based emissions reduction targets.
The rule creates two classifications for federal contractors: “Significant” contractors receive between $7.5 and $49.9 million in federal contracts, while the threshold for “major” contractors is $50 million in federal contracts annually. Significant contractors are required to report Scope 1 and 2 emissions, which include direct emissions produced by a firm and indirect emissions from generating sources of electricity that are purchased for a firm’s consumption from another entity. These requirements also apply to major contractors, as well as a requirement to report Scope 3 emissions, defined as greenhouse gas emissions from the operations of the firm that occur at sources other than those owned or controlled by the firm—usually a subcontractor and other members of a supply chain.
ACEC submitted comments on the rule, reflecting concerns from firms over the cost impact and other implementation issues. As the rule is written, many terms are vague and could be broadly interpreted. This variety of interpretation possibilities has significant cost implications and may create both advantages and disadvantages based on a particular interpretation. Many smaller firms also lack the expertise to determine greenhouse gas emissions, establish appropriate reduction targets, and measure and monitor whether those targets are being achieved. This would result in many small businesses having to hire consultants or outside staff to meet the proposed requirements.