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Inflation Reduction Act Update: Major Changes Coming For 179D and 45L

Inflation Reduction Act Update: Major Changes Coming For 179D and 45L

By Geoff Garber

Unless you have been living off the grid for the past several weeks, you have heard about the massive legislative package known as The Inflation Reduction Act of 2022 (“IRA”), or H.R. 5376. As expected, President Biden signed his cornerstone legislation into law on Tuesday. We gave a primer on the IRA’s impacts to 45L and 179D in a previous article titled The Inflation Reduction Act: Impacts to 45L and 179D. This article will dig further into the changes to 45L and 179D along with the new prevailing wage requirements that apply to both incentives.

Inflation Reduction Act Changes to 179D

The IRA is chock full of goodies for 179D, including triple deductions, new allocations available for non-profits and Indian tribes, and immediate deductibility for Real Estate Investment Trusts (REITs). Even with these improvements, prevailing wages and apprenticeships have come to the forefront of 179D discussions. For tax years beginning after December 31, 2022, the IRA changes the maximum (without bonus) 179D deduction to $1.00/sf. However, a taxpayer could increase that maximum deduction to $5.00/sf if it meets two new requirements related to prevailing wages and apprenticeships.

The prevailing wage requirement is as follows:

…the taxpayer shall ensure that any laborers and mechanics employed by the taxpayer or any contractor and subcontractor in the installation of any property shall be paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such property is located as most recently determined by the Secretary of Labor, in accordance with subchapter IV of chapter 31 of Title 40, United States Code.

In cases where government agencies, non-profits, or Indian Tribes allocate a 179D deduction to the building designer, the designer must ensure that the prevailing wage requirements are met. For general contractors and subcontractors, ensuring their direct employees meet these requirements is straightforward. General contractors can further ensure that subcontractors pay laborers prevailing wages by including language in their subcontract agreement to that effect.

However, architecture and engineering firms claiming 179D are further removed from the laborers employed by the contractors and subcontractors. How will a firm that is not a party to the labor contracts ensure that laborers are paid prevailing wages? Some contracts, such as those where the federal government is a party, must already meet prevailing wage rules under the Davis-Bacon Act (“DBA”). In those instances, the IRS might establish a safe harbor given that a law already exists that requires the company pay their construction workers a prevailing wage. For projects not falling under the DBA, architecture and engineering firms could request contractors’ pay rates and confirm that they meet the required rates. This could lead firms to vet contractors from the outset and to seek out contractors who meet the prevailing wage requirement. We expect the IRS to rely on the DBA rates found at

IMPORTANT: Taxpayers will automatically receive the increased deduction where installation of the energy efficient property began no later than 60 days after the Treasury Department publishes relevant guidance on prevailing wages and apprenticeships. There is no indication as to when the Treasury will publish guidance, but they have an incentive to do so quickly. Until then, 179D claimants should consider how these requirements will impact them and begin preparing for the transition.

Taxpayers must also meet new apprenticeship requirements to get the increased 179D rate of up to $5.00/sf. The rule is based on the new Section 45(b)(8), which requires that a certain percentage of labor hours be performed by a qualified apprentice in a registered apprenticeship program. A registered apprenticeship program is a program which is registered with the Department of Labor under the National Apprenticeship Act. These registered programs are overseen by a sponsor, which may be any person, association, committee, or organization operating and registering an apprenticeship program. A listing of sponsors can be found at

The required percentage of apprentice hours escalates to 15% over time based on when the project starts:


Project Start Date Required Apprentice Hours
Before 1/1/2023 10%
After 12/31/2022 and before 1/1/2024 12.5%
After 12/31/2023 15%


Labor hours are the total number of hours performed for construction, alteration, or repair by employees of the taxpayer, including those employed by any contractor and subcontractor. Excluded from this number are hours worked by foremen, superintendents, owners, or persons employed in a bona fide executive, administrative, or professional capacity (“excluded hours”).


Percentage of Hours=Hours Worked by Qualified Apprentices(Total construction hours - excluded hours)Percentage of Hours=(Total construction hours - excluded hours)Hours Worked by Qualified Apprentices​

Let’s apply these considerations to real life situations.

Scenario 1: 179D Where Construction is Already Underway

Assume that new construction has already commenced but the energy efficient property will not be placed into service until 2023. In that case, the project will automatically receive the bonus increase since guidance has not yet been published and the new rules would apply to tax year 2023. The actual deduction will depend on the energy efficiency of the systems installed, ranging from nothing if it does not meet the 25% energy savings threshold, to $2.50/sf if it meets the 25% threshold, and up to $5.00/sf if it reaches the maximum 50% energy savings mark.

Scenario 2: 179D Where Construction Begins Late 2022

Assume that construction has not begun and the IRS publishes guidance on prevailing wages and apprenticeships on October 15, 2022. If the construction begins on or before Wednesday December 14, 2022 (60 days after publishing the guidance), then the project will automatically receive the bonus benefits. If construction began on December 15, then the taxpayer must show that 10% of the hours in 2022 and beyond were qualified apprentice hours and that the laborers were paid a prevailing wage. It’s unlikely that the IRS will publish guidance that quickly, but there is an incentive for them to publish given the additional revenue that will be lost in the interim.

Inflation Reduction Act Changes to 45L

45L sees several changes as well with the IRA’s passage. The most notable is an extension as-is for the remainder of 2022 with a modified extension for 2023-2032. Here is a quick rundown of the credit changes starting in 2023:

  • For qualified single family and manufactured homes first acquired for use as a residence in 2023, the credit jumps to:
    • $2,500 with Energy Star becoming the new base qualification standard
    • $5,000 with Zero Energy Ready Home qualification
  • For qualified multifamily units first acquired for use as a residence in 2023, the credit is:
    • $500 per unit with Energy Star base qualification, potentially up to $2,500 if the taxpayer meets the additional prevailing wage requirement
    • $1,000 per unit with Zero Energy Ready qualification, potentially up to $5,000 with the prevailing wage requirement
  • Low Income Housing Tax Credit (LIHTC) properties no longer must reduce their adjusted basis under Section 42. This has been a major issue for LIHTC developers, requiring excess basis in the property to take advantage of 45L. LIHTC properties become a huge 45L opportunity area starting in 2023.

The multifamily-exclusive 45L bonus credits for prevailing wages track to the requirements described above for 179D, though there is no apprenticeship requirement with 45L. Also, there is no grace period for 45L, so the prevailing wage bonus will go into effect for all units sold or leased for use as a residence starting in 2023.

There will be a huge incentive for developers to meet the prevailing wage requirements given the 5x increase in their credit amount starting in 2023. The IRS will eventually provide guidance on the recordkeeping and compliance requirements related to the prevailing wages. In the interim, BRAYN is working with multifamily developers to better understand how to prepare for the requirements to avoid issues down the road.

We will continue to update our CPA partners and clients on the impacts of this legislation as we learn more. If you have any questions or thoughts, please reach out to us at or call us at (888) 773-8356.

IRS Circular 230 Disclosure – To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advise contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.