Your clients may benefit from deductions under the expanded 179D deductions if they are REITs, trial properties, or non-profits.
The Inflation Reduction Act (IRA) of 2022 is a $737 billion initiative to combat inflation while also investing in manufacturing, reducing carbon emissions, and increasing domestic energy output.
Many existing or recently expired energy efficiency tax incentives have been enhanced, and these benefits can considerably benefit owners of commercial and multifamily buildings, Builders, Developers, Investors, and Others
The 179D energy-efficient commercial building deduction and the 45L energy-efficient residential and multifamily credit are two important issues that you should become acquainted with and explain to your clients. Before we proceed, it is crucial to note that as of August 14, 2022, these regulations had not been signed into law and are susceptible to modification.
Let’s get into the specifics now.
Expansion of the 179D Deduction for Energy-Efficient Commercial Buildings
Under the IRA, the 179D tax deduction has increased and expanded. The permanent 179D deduction is increasing from the existing $1.88 maximum to $5 per square foot under current legislation. This reduction will help clients with commercial building construction and multifamily structures with four or more floors.
The deduction will also apply to older structures that are being retrofitted.
The new guidelines will allow tax-exempt building owners to pass the deduction on to architects, engineers, and designers of energy-efficient buildings. Previously, only government building owners were allowed to use this money for designers.
A few critical points to remember about the 179D adjustments that are taking place and should be considered by all clients are as follows:
- The present version of 179D will be extended in its current form until December 31, 2022.
- New deduction increases and modifications will take effect on January 1, 2023.
- According to the most recent ASHRAE Standard, energy reduction (“ER”) will be reduced from 50% to 25%.
- On January 1, 2023, the deduction will be reduced to $.50 per square foot, with an additional $.02 deduction per square foot for each point above 25% ER, up to a maximum of $1.00 per square foot; OR, if the prevailing wage requirement is met, a bonus deduction of $2.50 plus $0.10 per square foot above 25% ER is possible, with a maximum deduction of $5.00 per square foot.
- Partial benefit allowances are no longer available.
- New qualified retrofit plan qualifications have been established.
Your clients may benefit from deductions under the expanded 179D deductions if they are REITs, trial properties, or non-profits. Deductions are also available for publicly financed projections with existing regulations.
The 45L Energy-Efficient Home and Multifamily Credit have been modified.
The 45L energy-efficient residential and multifamily credit has also been significantly increased, extended, and expanded. The retroactive extension of the 45L credit to the end of 2032 will be of particular importance to your clients if they are homebuilders or multifamily developers.
The $2,000 credit for each dwelling unit and the energy efficiency criteria have not been changed for 2022.
However, in 2023, the maximum tax credit for a dwelling unit in both multifamily and single-family buildings will be $5,000. Criteria for what is considered “energy efficient” will be consistent with the Department of Energy’s Energy Star and zero-energy ready home programs.
While only low-rise residential developments were qualified for this credit in 2022, residential developments will be eligible in 2023.
The many credits will be particularly useful for builders in 2023 who want to help with the housing crunch and develop more energy-efficient homes.
However, some modifications to the 45L credit may make it more difficult for clients to maximize their energy-saving tax breaks. A significant difference that clients should be aware of is that salaries for the project on which they are attempting to claim credits must, in some situations, must be at or above the local rates specified by the Secretary of Labor.
All multifamily developments, including mid- and high-rise projects, are eligible for 45L tax credits and 179D tax deductions.
The following are some significant changes to 45L credits:
- The previous rules have been extended until December 31, 2022.
- The IRA’s rules will be changed from January 1, 2023, through December 31, 2032.
- The low-base credit is $500 per multifamily unit, with a bonus credit of $2,500 per unit if the prevailing wage conditions are met.
With the passage of the IRA, Congress makes it clear that energy efficiency and climate change are two major issues on their agenda. Extensions and incentives for tax credits and deductions have been greatly enhanced, allowing more of your clients to claim them than ever before.
The tax laws are very complex. Our short blog articles cannot cover in full all the nuances of the rules. Your specific facts may hold various opportunities and possible risks that only trained, experienced, and highly qualified tax specialists can spot. We encourage you to find such help, rather than trying to figure it all out on your own. Consider giving this marketplace a try by posting your project and signing up here.
If you are a licensed tax professional and are interested in helping others either part or full-time, or ad hoc, come on in! Happy to have you. Our marketplace has the full suite of tools to communicate with clients including compliance calendars, task and message management, and billing. You can also quickly connect to knowledgeable colleagues who can complement your services with the ones you do not provide. Register here