The Inflation Reduction Act, passed in 2022 and effective January 1,2023, expanded the benefits available to taxpayers under IRC Section 179D, otherwise known as the Energy-Efficient Commercial Buildings 179D Tax Deduction. Originally enacted in 2005 as a temporary deduction under the Energy Policy Act, Section 179D was made permanent by the Consolidated Appropriations Act of 2021. The recent enhancements to this legislation provide significant advantages to craft breweries, allowing for immediate and enhanced deductions for qualifying energy-efficient properties that would otherwise need to be depreciated over 39 years.
Defining energy efficiency
What constitutes “energy-efficient” is determined by American Society of Heating, Refrigeration and Air-Conditioning Engineers (ASHRAE) standards. Eligible property must be installed as part of the interior lighting systems, heating, cooling, ventilation and hot water systems, or the building envelope, whether as new construction or retrofit. According to a study by the U.S. Environmental Protection Agency, the primary sources of electricity usage in breweries are refrigeration and packaging at 35% and 25% of total electricity usage, respectively.
The enhanced deduction is based on the percentage of total annual energy and power cost savings as defined by ASHRAE. Starting in 2023, there are two deduction options: base and bonus. The base deduction ranges from $0.50 per square foot for buildings achieving 25% energy savings up to $1 per square foot for 50% or greater savings. The bonus deduction ranges from $2.50 per square foot for 25% energy savings up to $5 per square foot for 50% or greater savings.
Qualifying for deductions
In order to qualify for the bonus deduction, local prevailing wage rate and apprenticeship requirements must be met. The prevailing wage rate is the “average wage paid to similarly employed workers in a specific occupation in the area of intended employment” and differs from state to state. The possible tax savings on breweries of various sizes using the maximum passthrough entity tax rate of 29.6% is illustrated by this chart:
Understanding the downsides
Although craft breweries can reap substantial benefits from Section 179D, there are also potential pitfalls to consider. Firstly, a written certification from a state-licensed engineer or contractor is required to confirm the building’s eligibility for the deduction. Additionally, meeting the bonus deduction requirements is likely a result of increased labor costs. Another important consideration for breweries, which often rely heavily on depreciation as a tax-savings technique, is that the deduction reduces the building’s basis, which impacts future allowable depreciation and affects the gain or loss if the property is ever sold.
The enhancements to the 179D tax deduction could be significant if your brewery has invested in energy-efficient property or plans to in the future.
About the Authors
Matt Mercurio, CPA is a Tax Manager with Wipfli, LLP in Atlanta, Georgia with a focus in beverage manufacturing.
Ragan Holcomb, CPA is a Tax Senior Accountant with Wipfli, LLP in Atlanta, Georgia with a focus in beverage manufacturing.
Tim O’Neill is a tax Senior Manager and leads the beverage manufacturing group at Wipfli LLP in St. Louis, MO.
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