The Energy Efficient Commercial Buildings Deduction (Section 179D) and the New Energy Efficient Home Credit (Section 45L) were improved by the August 2022 passage of the Inflation Reduction Act (IRA). Here’s all the information you need to take advantage of these tax incentives efficiently.
Section 179D: Energy-Efficient Commercial Buildings Deduction
For projects between January 1, 2005, and December 31, 2022, Section 179D offers a deduction of up to $1.88 per square foot; for properties put into service in 2033, the deduction is up to $5.00 per square foot.
Enhancements to 179D
- The basic deduction rate will grow progressively to $1.00 per square foot for a 50% improvement against a baseline norm starting in 2023, from $.50 per square foot for a 25% improvement. Projects that fulfill the standards for apprenticeship and prevailing wage are eligible for a bonus deduction. Starting at $2.50 per square foot, this extra deduction rises to $5.00 per square foot (10 cents for every percent improvement).
- A building may be eligible for the 179D deduction every three or four years, provided that at least one of the energy-efficient systems gets upgraded. This is possible as the IRA has changed the lifetime cap on the 179D deduction to a three- or four-year cap, depending on the ownership structure.
- Private building owners are still eligible for this deduction, as are some tax-exempt organizations that may assign the deduction to the “designer” (usually an architect, engineer, or contractor mostly in charge of creating the design for the property).
Among the qualified tax-exempt entities are:
- State or municipal government bodies
- Federal government
- Tribal administrations
- Additional tax-exempt entities, such as nonprofit healthcare
Buildings held by private entities
The Section 179D Energy Efficiency Tax Deduction applies to any privately owned four-story or higher residential and commercial buildings put into operation on or before January 1, 2006, including multifamily, elder living, retail, healthcare, and student housing. The deduction is available to the owner of the energy-efficient commercial building property (EECBP). Usually, the building owner, although renters who have paid for and are depreciating the EECBP, may also be included.
Buildings owned by tax-exempt individuals
- Energy incentives are now monetizable by tax-exempt organizations for the first time in the history of legislation. Big winners in 2023 and beyond include healthcare, tribes, governments, other charitable organizations, and the architects, engineers, and contractors that create their structures.
- All tax-exempt buildings (new and refurbished) that are substantially completed on or after January 1, 2023, may be able to capitalize on the Section 48 Clean Energy Investment Credit and the 179D deduction thanks to the IRA.
- The technical specifications for the installation of EECBP are created by a designer, who may include general contractors, engineers, and architects. However, a person who only installs, fixes, or looks after the property is not a ‘designer.’
- Projects may have more than one qualified designer.
Section 45L: New Energy Efficient Home Credit
The Energy Policy Act of 2005 also included Section 45L, New Energy Efficient Home Credit, comparable to Section 179D, Energy Efficiency Deduction. The 45L Residential Credit for single-family and multifamily properties (three stories or fewer, above grade) was extended by the IRA through the end of 2022 at the existing rate of $2,000 per unit and increasing values through the end of 2032.
For first-time occupants in an open tax year and before January 1, 2023, the 45L New Energy Efficient Home Credit offers a credit of up to $2,000 per unit; for projects put into service between December 31, 2022, and January 1, 2033, the credit is up to $5,000 per unit.
Improvements to Section 45L
- In 2023, there will be a change to the Section 45L credit. Multifamily dwellings will now be eligible for a primary credit of $500 per unit and a bonus credit of $2,500 per unit, provided the projects fulfill the conditions for prevailing wage and apprenticeship. Projects certified under the DOE Zero Energy Ready Home Program are eligible for additional credits.
- The basic credit is $2,500 per unit for townhomes, mobile houses, duplexes, and single-family homes.
- The height of the qualifying project for energy-efficient multifamily complexes seeking the 45L credit will not be limited starting in 2023.
- There is no base decrease for 45L projects eligible for affordable housing projects that qualify for the Low-Income Housing Tax Credit (LIHTC). Therefore, these projects can claim both the 45L and the LIHTC.
Qualifying for tax credits and deductions related to energy efficiency
Determining your eligibility is the first step towards comprehending the energy-efficient credits and deductions. The following are vital signs that you could qualify under Sections 45L or 179D:
- You are a building owner who built or renovated your structure with energy-efficient HVAC or lighting.
- You are the tax-exempt entity’s “designer” of an energy-efficient structure.
- You are a builder of production homes or the owner of a multifamily structure with 10 units or more.
Considering the future
You’ll be happy to hear that the Inflation Reduction Act dramatically improves the 179D Energy Efficient Commercial Buildings Deduction and the 45L New Energy Efficient Home Credit if you’re motivated to save money and go green. Developers, owners, and architects can also minimize tax burdens while designing and constructing responsibly.
Significant tax savings can result from energy efficiency. By working with a reliable expert, you may take full advantage of additional tax savings options and these energy efficiency tax advantages. Get in touch with the National Tax Group to find out how these tax breaks might help your company and how much you might be qualified for.