How you can claim the Inflation Reduction Act’s green building tax incentives
The Inflation Reduction Act of 2022, signed into law on August 16, is designed to address energy, tax and health policy.
The act has direct impact on the real estate and construction industry, with new and expanded green building tax incentives for anyone constructing or improving real property. With changes to the 179D commercial building deduction and the 45L home tax credit, the act incentivizes the construction and renovation of energy-efficient buildings. Here are the highlights:
Significant increases to 179D tax deduction
The section 179D tax deduction was originally passed by Congress as part of the Energy Policy Act of 2005. Section 179D allows qualifying building owners and businesses to receive an immediate first year tax deduction for a new or remodeled commercial building.
The 179D deduction will operate in its current form through year-end 2022. After January 1, 2023, the following changes apply:
179D tax deduction increase: For those who qualify for the 179D tax deduction, the new legislation raises the deduction value from the current maximum of $1.88 per square foot up to a maximum of $5.00 per square foot, subject to an annual inflation adjustment.
Energy criteria: Currently, the 179D deduction allows taxpayers to expense improvements that improve a building’s energy efficiency by 50% as compared to ASHRAE standards. However, partial deductions can be taken per subsystem (e.g., lighting, HVAC, or building envelope) that meet the 50% test.
Beginning in January, deductions will be available for buildings that improve energy efficiency by 25%. The deduction amount increases for every percentage point of energy efficiency above the 25% benchmark. (For more on the revised 179D deduction calculation, see our related piece How the Inflation Reduction Act expands the deduction for energy-efficient buildings.)
Tax-exempt building owners: In one of the biggest impacts of the legislation, tax-exempt building owners, such as nonprofits and tribal entities, will be able to allocate deductions to the architects, engineers and design build contractors responsible for designing the specific building energy efficient systems. Previously only government building owners were allowed to allocate the deduction to designers.
REIT calculations: REITs can now utilize 179D deductions in calculating earnings and profits.
The 45L energy efficient home credit
The 45L tax credit has been in place since 2006 and rewards home builders for energy efficient residential construction. This applies to home builders as well as owners of multifamily housing apartment complexes. Currently, the credit provides a $2,000 credit to homes that meet certain energy efficiency requirements.
45L retroactive tax credits: The credit had expired as of January 1, 2022. However, the legislation retroactively extends the 45L tax credits for residential qualifying units acquired or leased before December 31, 2022. Here again, the credit value and energy requirements remain the same until year-end.
45L maximum credit increase: Beginning January 1, 2023, the maximum credit for 45L will increase, with new tax credits ranging from $2,500 to $5,000 per single-family home and $500 to $5,000 per multifamily dwelling unit.
More specifically, homes eligible to participate in the ENERGY STAR Residential New Construction Program or Manufactured Homes Program may be eligible for a $2,500 credit. A maximum credit of $5,000 is available for new homes certified as Zero Energy Ready.
For multifamily homes, credits vary based on both energy standards and adherence to prevailing wage requirements:
- The base credit per unit decreases to $500
- Credits for Zero Energy Ready units are $1,000 each
- For multifamily units that meet prevailing wage requirements, the credit increases to $2,500 for qualifying energy efficient units and $5,000 for Zero Energy Ready units
LIHTC projects: Also new, the legislation establishes that Section 42 Low income Housing Tax Credit (LIHTC) projects are no longer required to reduce their basis when taking the 45L tax credit. This is significant for LIHTC developers who generally weren’t able to claim the 45L credit due to the corresponding reduction on their LIHTC.
Energy standards, building height: The switch to Energy Star qualification criteria is also new. Previously, 45L eligibility was determined using the 2006 International Energy Conservation Code standard. As a result of this change, all residential developments will be eligible (before only low-rise buildings of three-stories or less qualified).
Wipfli can help reduce your tax liability
Wipfli provides tax planning services for real estate and construction. Talk to us about how the Inflation Reduction Act will impact your business. We can identify credits and incentives, including a lookback for retroactive claims, to reduce your tax liability.
Wipfli offers a complimentary preliminary analysis to determine whether your building qualifies for green building tax incentives. If it does, we can also provide the necessary certification study. If you have questions or want further details, contact us to get started.
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