Posted by Robert Hancock on 02.10.25

With another tax season underway, those who work in the construction industry are likely seeking ways to reduce their tax liabilities. Fortunately, there are two great ways construction companies can save thousands to millions of dollars—the research and development (R&D) tax credit and the 179D energy tax deduction.

R&D Tax Credit

The federal government implemented the Research and Experimentation tax credit in 1981 to create jobs and spur technology in the U.S. Known as R&D tax credits, the program was meant to be a temporary measure to give the economy a boost.

After many temporary extensions, the tax credit was made permanent by Congress in 2015 to allow companies that create innovative products and processes to receive tax credits for the qualified activities they conduct. Historically applied to technological and biomedical research work, the scope of what the government considers “research and development” has expanded over the years to include work done in the construction industry.

Download our free e-book: The Contractor's Guide to R&D Tax Credits

When you think about it, the very nature of the work performed by the construction industry is innovative. That means contractors, engineers and architects may qualify for R&D incentives to cover areas such as employee wages, material costs and payments made to outside consultants for engineering and testing. Other activities include the design of buildings, bridges, roadways and LEED projects.

179D Tax Deduction

Established by the Energy Policy Act of 2005, the 179D is a tax deduction business owners can take to reduce the initial costs related to energy-efficient buildings. Additionally, architects, engineers or contractors involved in the design work of buildings owned by government entities or non-profits including Charitable organizations, Religious institutions, Private schools and colleges, Non-profit hospitals, Private museums, Tribal governments and any other organization falling under §501(c) can be allocated these deductions by the owning entity. 

While the R&D tax credit is a dollar-for-dollar reduction in taxes owed, the 179D tax deduction reduces taxable income for the year. 

Properties placed in service prior to 2023 must reduce total annual energy and power costs with improvements to the property’s building envelope or to the interior lighting, heating, HVAC or hot water systems. The maximum available deduction is $1.80 per square foot for a 50% deduction in total annual energy and power costs. Partial deductions are available for energy cost reduction improvements and lighting-focused improvements.   

The Inflation Reduction Act of 2022 makes calculating the value of 179D more complicated for properties placed in service in 2023 or later, but it also enables taxpayers to achieve significantly higher deductions. The amount of the deduction is determined by (1) the percentage of energy efficiency gained over baseline and (2) the optional adherence to prevailing wage and apprenticeship requirements. 25% is the minimum savings needed to achieve the deduction, and 50% is the maximum. The IRA also introduced prevailing wage and apprenticeship provisions. If contractors meet these optional requirements, they may be eligible for a 5x multiplier on their 179D deduction amounts. 

The qualification criteria changes that will be effective for properties placed in service from January 1st, 2023 through December 31, 2032, are as follows: 

For projects meeting the prevailing wage and apprenticeship requirements, energy reduction standards will change as follows; 50% reduction against the ASHRAE standard will now be 25% and will yield a §179D Tax Deduction of $2.50/SF and for every 1% of additional reduction above 25% it will provide an additional $0.10/SF of deduction up to $5.00/SF 

For buildings that DO NOT MEET the prevailing wage and apprenticeship requirements, energy reduction standards will change as follows; 50% reduction against the ASHRAE standard will now be 25% and will yield a §179D Tax Deduction of $0.50/SF and for every 1% of additional reduction above 25% it will provide an additional $0.02/SF of deduction up to $1.00/SF 

ASHRAE standards to be used for qualifications shall be the ASHRAE standard that was affirmed four years prior to the dates on which the commercial building property was placed into service. 

A New qualified retrofit plan for actual performance-based qualification will be in place. Actual guidelines on how this program will work will be released in the future by the DOE/Secretary.

Prevailing wages are the average wage a specific type of employee could expect to earn in a specific area. Due to differing costs of living, prevailing wages vary state-by-state and region-by-region. 

A list of prevailing wages may be found at www.sam.gov. Taxpayers wishing to request prevailing wages for job titles and geographic locations not included on this site should email IRAprevailingwage@dol.gov. Further guidance regarding prevailing wage requirements is included in IRS Notice 2022-61. 

In order to achieve increased (“bonus rate”) 179D deductions, taxpayers must abide by both prevailing wage and apprenticeship requirements. Contractors or subcontractors that employ four or more individuals are required to employ at least one qualified apprentice. 

Apprenticeship requirements will increase over a three-year period, as outlined in the chart below. 

Note:Taxpayers can be deemed as satisfying the requirement if they make a good faith effort to request qualified apprentices from a registered apprenticeship program and their request is denied or if the program fails to respond within five days of the request. IRS Notice 2022-61 contains additional information about the “good faith effort” exception. 

See related blog: Does Your Business Qualify for Energy Tax Benefits?

Both the R&D tax credit program and the 179D tax deduction require careful documentation to prove eligibility. For example, properties being considered for 179D must be inspected by a certified engineer or contractor.

Tax Point Advisors provides R&D tax credit study services and other specialty tax services to CPA firms and their clients throughout the U.S. To learn more about R&D tax credits and the 179D tax deduction from the experts at Tax Point Advisors, please call us at (800) 260-4138 or please leave us a message below.