By Ivan Sarkissian, Shareholder and Co-Founder at McConaughy & Sarkissian P.C.
On Aug. 16, the Inflation Reduction Act was signed into law by President Joe Biden. The new law addresses climate change, health care and alleviates inflation, some of which will directly impact the commercial real estate and construction industry. Here is what architecture, engineering and construction professionals need to know about the bill.
Financial Incentives to Integrate Clean Energy
The Inflation Reduction Act aims to use financial incentives to motivate companies and individuals to integrate cleaner energy into new and existing commercial and residential buildings. A total of $362 million is being allocated to commercial energy efficiency tax deductions, which may incentivize and motivate new construction projects moving forward and decrease the pricing of sustainable materials. This comes as no surprise as some experts are predicting the country’s electricity grid may double in capacity by 2030, primarily with renewable sources. It is currently unclear whether retrofitting or ground-up will become the new norm in future construction.
Make it in America
A major incentive to the bill is the new “Make it in America” initiative, which provides for more American-made equipment to be implemented into energy production and expands tax credits for wind, solar and nuclear energy among others, furthering their credits to companies with registered apprenticeship programs and companies paying employees prevailing wages. Companies that do not incentivize employees with prevailing wages may be penalized and owe said employees with the difference in their wage, plus interest.
Corporate Tax Increases
Beginning in 2023, roughly 200 U.S. corporations could be facing significantly higher taxes compared to previous years, as the IRA is instituting a 15% corporate minimum tax to businesses reporting $1 billion or more in annual earnings. Additionally, companies actively investing in “nongreen” capital assets like machinery and equipment may be penalized under the maximum tax.
Although this tax is only targeted at high-income corporations in the United States, the effects are sure to trickle down to smaller businesses, primarily those in the construction industry. The increased taxes on American companies are predicted to dramatically increase material costs on nonresidential projects where average costs have already risen dramatically since 2020.
There may be some tax relief for companies qualifying as small businesses. There are some notable provisions for small companies leading businesses under the new bill including lower health care costs and tax credits on energy-efficient improvements and clean commercial vehicles. Changing to low-cost solar power could benefit smaller companies by lowering operating costs while also granting them a 30% tax credit on the cost of switching over. Additionally, business owners that own their building can receive another tax credit of up to $5 per square foot for energy-efficient improvements designed to decrease their utility bills. The last provision is a potential 30% tax credit for the purchase cost of clean commercial vehicles bought for the company. These include, but are not limited to, electric and fuel cell models.
A positive outlook on the implementation of the bill is the anticipated future of construction. With many large corporations looking to integrate clean and green energy into their current operations, construction companies will see more money and interest in projects. This will drive business to construction firms in urban and rural areas and will lay the groundwork for establishing expertise in clean energy construction.
It’s important to understand the impacts of this new law and how to prepare for potential risks and future changes. With the Inflation Reduction Act in place and beginning to roll out, professionals in the AEC industry may see an increase in opportunities and benefits in energy-efficient projects.
The information provided does not constitute legal advice. For information regarding your company’s operations, please consult with your construction law professional.