On August 16, 2022, The Budget Reconciliation Bill, also known as the Inflation Reduction Act, was signed into law. A smaller version of the failed $1.75 trillion Build Back Better Act, The Budget Reconciliation Act allocates $700 billion for climate change, healthcare, and a tax package. The Bill was passed exclusively along party lines, a unanimous yes from democrats and a unanimous no from republicans. The vote ended at 51-50, the tie broken by Vice President Kamala Harris.
Climate change is one of the hottest buzzwords and pressing issues of today’s culture and news cycle, especially recently. A relatively new brainchild of the Biden Administration, the Budget Reconciliation Bill, a tax and spending legislation, poses a variety of incentives and investments for upgrading homes and commercial buildings. It also includes multiple proposals for renewable power, an electric grid, energy storage, and more. With all of these changes, the bill could reduce carbon emissions by 40% by 2030. A victory in the rollout of the Biden Administration’s social agenda pushed through by senators from Virginia, Arizona, and New York, it contains significant changes to the 179D tax credit.
What Does the Bill Change?
This bill would more than double current incentive levels for those in the building sector working with energy-efficient improvements for homes and businesses. The section 179D incentive for an energy-efficient building is to increase from $1.80 per square foot to a range between $2.50 and $5, contingent on adherence with heightened labor and wage standards. It also makes the deduction available for renovations. The Section 45L credit for energy-efficient new home construction would also increase from its current $2,000 to $2,500 for meeting Energy Star requirements. Additionally, the movement to the Energy Star metric makes multifamily projects more appealing.
This section would also include a credit of $5,000 for net-zero energy homes. Further, it would change the relevant energy standard from two years before the beginning of construction, to two years before the building is in service. It does remove the partial allowance for resource efficiency in the areas of HVAC, lighting, and building envelope. This bill expands the 179D credit to include non-profit organizations, including private colleges and universities, churches, political organizations, and Native governments.
These changes, however, do add complexity to the qualification process. It is crucial that the design for structures that qualify for tax incentives are original. This added obstacle, though, is balanced by the decreased energy savings requirements and the increase in value for the deduction. Most of the time the energy-efficient aspects of a building can qualify for local utility rebates or federal energy grants as well.
Although these changes make it more difficult to qualify, the large increase in deductions and credits will make it more attractive to make an attempt. For building owners that are having trouble meeting the energy standards that were not yet promulgated when construction began, there has been a deduction in energy savings target, down to 25% from 50%, to mitigate this issue. The Treasury Department may provide relief by rolling out the affirmation of energy standards, but in the meantime, the decrease of the energy savings target should suffice.
Things to Consider
When thinking about your return on investment, don’t forget all the incentives that can be used simultaneously in the first year, it’s vital that you ask which credits and deductions can be layered in the optimal way to maximize your return. Also, an energy-efficient design doesn’t just make you privy to a host of deductions and credits, it also lowers everyday operating costs.
Anyone in the construction and building industry should make themselves very familiar with these changes. They have gone into effect for buildings placed into service or mostly completed in the case of residencies, as of December 31, 2021. These adjustments are complicated, so make sure to seek the advice of professional tax group services so as not to incur any penalties. At National Tax Group, it’s what we do. Contact us today to discuss your project, the new changes to code section 179D, and how we can help you reap the most benefit.