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The Inflation Reduction Act (IRA), passed in August, significantly enhances the 179D Energy Efficient Commercial Buildings Deduction and the 45L New Energy Efficient Home Credit.
Changes to 45L and 179D
The 179D Energy Deduction and 45L Residential Credit were originally introduced in the Energy Policy Act of 2005 as annual extenders, meaning the provisions sunset and were renewed every few years. In late 2020, the 179D Energy Deduction was made permanent at $1.80/square foot (SF) in the Consolidated Appropriations Act of 2021, indexed to inflation.
The IRA extended the 45L Residential Credit at the current rate of $2,000 per unit for single-family and multifamily (three stories and less) through the end of 2022, and both the 179D Energy Deduction and the 45L Residential Credit are extended at increased values through the end of 2032.
179D Energy Efficient Commercial Building Property is a deduction of up to $1.88/SF for properties placed in service prior to 1/1/2023, and up to $5.00/SF for projects placed in service between 1/1/2023 and 12/31/2032.
The 45L New Energy Efficient Home Credit is a credit of up to $2,000 per unit for properties placed in service prior to 1/1/2023, and up to $5,000 per unit for projects placed in service between 1/1/2023 and 12/31/2032.
Ten years of certainty (until 2032) allows for proactive planning, including:
- Accounting and tax departments incorporating these incentives into their Capitalization Policy and Fixed Asset Ledgers.
- Developers, owners, contractors, and architects including these incentives during design and construction.
These increased benefits can allow accounting and tax departments to both increase cash flow and contribute to ESG efforts. And developers, owners, contractors, and architects can design and build sustainably while also minimizing tax liabilities.
"The tax deduction is the ultimate benefit of the 179D deduction, but the most substantive thing about going through the process with Eide Bailly was that they did all of the heavy lifting … so that I didn't have to take time away from my day-to-day duties."
Paul Arnold, President | PG Arnold Construction
179D Energy Deduction Enhancements
Starting in 2023, the base deduction rate starts at 50 cents/SF for 25% improvement against a baseline model and increases incrementally up to $1/SF for 50% improvement. A bonus deduction is available for projects meeting prevailing wage and apprenticeship requirements. This bonus deduction starts at 2.50/SF and increases 10 cents for each percentage improvement up to $5/SF.
For Qualifying 179D projects placed in service after 1/1/2023
The IRA modifies the previous lifetime limit on using the 179D deduction to instead a three-year cap, meaning a building can be eligible for the 179D deduction every three years assuming at least one of the systems contributing to energy efficiency has been properly renovated.
This deduction is now applicable to real estate investment trusts, and still applies to private building owners along with certain tax-exempt entities who can allocate the deduction to the “designers” (generally architects, engineers, and contractors who are primarily responsible for designing the property). Qualified tax-exempt entities include:
- Federal government
- State or local government entities
- Indian tribal governments
- Other tax-exempt organizations including not-for-profit hospitals
45L Residential Credit Enhancements
Under the IRA extension, energy efficient single-family homes and multifamily developments three stories and less can receive a tax credit of $2,000 per unit, and manufactured homes can receive a tax credit of $1,000 per unit.
The 45L Residential Credit is changing in 2023, with multifamily homes starting at a base credit of $500/unit, and a bonus credit of $2,500/unit for projects meeting prevailing wage and apprenticeship requirements. Additional credits are available for projects meeting the DOE Zero Energy Ready home program requirements.
For single-family homes and manufactured homes, the base credit is $2,500/unit, increasing to $5,000/unit for projects meeting prevailing wage and apprenticeship requirements.
For Qualifying 45L projects placed in service after 1/1/2023
Starting in 2023, there are no limits on the height of the qualifying project or energy efficient multifamily projects pursuing 45L Residential Credits.
For affordable housing projects qualifying for the Low Income Housing Tax Credit (LIHTC), there is no basis reduction for 45L projects, meaning qualified projects can claim both the LIHTC and 45L.
Choosing the right firm for Energy Efficiency Credits and Deductions
Tax credits and deductions exist to help taxpayers save money and promote energy efficiency. The first step is understanding whether a project qualifies for these incentives. Working alongside a trusted business advisor with a proven track record in the energy efficiency space will help you maximize these new opportunities.