Almost $400 billion in grants, loans, and tax incentives included in the Inflation Reduction Act (IRA) will be monetized for the first time in 2024. In 2023, federal agencies went into overdrive, producing instructions to educate professionals in the commercial real estate industry, including developers, asset and property managers, tax attorneys, CPAs, designers, bankers, investors, and others, about implementing the IRA. With the filing of corporate tax returns for projects put into operation in 2023, the hundreds of billions the IRA offers will begin to flow in 2024. Here are some of the top updates that you should know in 2024.
179D Deduction
Tax Exempt Organizations become Eligible, Lowers Thresholds, and Almost Triples Tax Incentives
The most significant revisions to the incentives for building owners and designers to increase building efficiency are found in the recently approved Inflation Reduction Act’s (IRA) 179D Energy Efficient Commercial Building Deduction. Construction on the original Energy Policy Act (EPAct) of 2005 Section 179D, which has made minor incremental revisions in prior years, supports sustainable construction projects with more significant incentives that are more broadly available to building owners and project design consultants.
Greater Reward with Lower Energy Savings Barrier
The revised Act takes effect on January 1, 2023, and increases the deduction value from the existing maximum of $1.88 per square foot to a maximum of $5.00 per square foot. It also introduces additional standards for achieving apprenticeship and prevailing wage requirements, with fewer incentives if these requirements still need to be fulfilled.
Furthermore, in comparison to ASHRAE Reference Standard 90.1-2007 (until updated), the Act reduced the minimum required savings in total annual energy and power cost from a 50% reduction to a 25% reduction. It also includes an alternative retrofit design approach that uses Energy Use Intensity (EUI) instead of savings percentage. The Act gives $2.50/sf for projects that achieve the 25% savings criteria and the prevailing wage and apprenticeship standards. Additionally, there is an extra $.10/sf for each percentage of savings up to 50% at $5.00/sf. These modifications also move the emphasis from a per-system approach—where lighting, HVAC, and envelope work would each receive an allocation of about $.60/sf—to a whole-building energy effect.
Charitable Organizations Eligible
The 179D incentives were previously exclusively available to owners of commercial buildings and architects of structures controlled by government agencies. However, as of late, structures and energy-efficient retrofit systems created for tax-exempt organizations are now eligible, including:
- Non-profit organizations;
- Charitable organizations;
- Private hospitals;
- Museums;
- Private schools or universities;
- Tribal governments, and
- Religious institutions.
This also means that the crucial deduction is now available to engineers, architects, and energy-efficiency design/build contractors working on projects with tax-exempt organizations that designate them as such.
Hot water and HVAC Systems
Installing more recent, high-efficiency equipment (such as heat pumps, VRFs, etc.) or adding intelligent HVAC automation controls to already-existing equipment (such as chillers, boilers, air handling units (AHUs), rooftop units (RTUs), energy recovery ventilators (ERVs), fan coils, VAVs, etc.) are examples of qualifying energy-efficiency projects for HVAC systems. When HVAC systems are outdated or inefficient, we develop and suggest the best “deep green” turnkey solutions that are “right-sized” for the building’s needs.
Furthermore, adding power factor correction solutions, high-efficiency motors, and variable frequency drives (VFDs) can help save money and reach the 179D level. The energy savings are usually highly significant, generally resulting in a 20–30% reduction in HVAC, which accounts for a substantial portion of the building load.
In addition to making the facility eligible for the 179D incentive, these upgrades are a wise long-term investment since they save power expenses and maintenance costs, enhance the environment and air quality, and leave a smaller carbon imprint.
45L Residential Energy Efficiency Credit
Projects that go into service on January 1, 2023, to have different qualifications, stricter energy efficiency regulations, and prevailing wage norms need to be in place. The crucial tax credit has been modified and extended through 2032 as part of the Inflation Reduction Act (IRA). With effect from January 1, 2023, this federal benefit is now directly linked to certification to a renewed version of the applicable ENERGY STAR program standards for eligible houses and apartments. Moreover, buildings taller than three floors are now included in the list of eligible properties.
There are two levels of credit distribution:
- $5,000 for homes that fulfill the standards of the DOE’s Zero Energy Ready Home (ZERH) program; and
- $2,500 for homes certified as ENERGY STAR buildings.
Multi-family residences can qualify for several tax credits depending on the degree of energy efficiency and prevailing wage and apprenticeship regulations.
If a single multifamily home satisfies the requirements for ENERGY STAR Multifamily certification, it may be eligible for a $500 tax credit. Although this is less than the prior credit, there are still ways to gain more money:
- $1,000 for every multi-family home that satisfies the standards to become a Zero Energy Ready Home;
- $2,500 for every unit that satisfies prevailing wage regulations and ENERGY STAR® standards;
- $5,000 for each unit that satisfies the standards for a Zero Energy Ready Home and prevailing pay guidelines;
It should be noted that only multi-family housing built in 2023 and after is subject to prevailing wage.
Prevailing Wage & Apprenticeship Requirements
The kind of worker classification and the construction location will determine the prevailing wage criteria. Project owners’ responsibility is to establish proper salary rates with the Department of Labor. Requirements for apprenticeships could vary based on where you live. With apprenticeship hours, project owners may be eligible for the more considerable tax credit; however, they must demonstrate that they have made good faith attempts to meet the requirements.
The required number of apprenticeship hours for projects put into service in 2023 and beyond varies depending on the year construction started.
- 2022: 10%
- 2023: 12.5%
- 2024–2032: 15%
It’s time to step it up
The Inflation Reduction Act of 2022 (IRA) introduced new clean energy tax credits and incentives while strengthening existing ones. It’s critical to remain current on the requirements for these different tax credits and incentives as we approach 2024.
Businesses are encouraged to embrace sustainability while enjoying considerable financial benefits from the enhanced tax incentives improved by the IRA to boost their savings while overcoming growing energy prices and promoting energy efficiency and conservation. Contact the National Tax Group for correct guidance and to understand how these changes can impact your company.
Method of Computation
The percentage decrease in the total annual energy and power expenses to the combined utilization of a building’s heating, cooling, ventilation, hot water, and interior lighting systems compared to the Reference Building must be calculated using the Performance Rating Method (PRM).
PRM comprises the following calculations:
- The total energy and power costs for the following components of a Reference Building that is equivalent to the Proposed Building and is situated in the same climate zone are identical to the Reference Building Energy and Power Costs: Interior lighting, heating, cooling, ventilation, and hot water.
- By deducting proposed building energy and power costs from reference building energy and power costs and expressing the difference as a percentage of reference building energy and power costs, one may calculate the percentage reduction in energy and power costs.
- The procedures for baseline building performance in the PRM found in Appendix G of Standard 90.1-2004 must be followed to ascertain the Reference Building’s energy performance.
- The Reference Building must use the following extra specifications from the 2005 California Title 24 Nonresidential Alternative Calculation Method (ACM) Approval Manual to determine baseline building performance:
- The ACM Tables N2-2 for entire building values and Table N2-3 for building area values suited for mixed-use buildings include information on the number of inhabitants, occupant sensible and latent heat loads, receptacle loads, and hot water loads;
- ACM Tables N2-4 through N2-9; occupancy, HVAC, fans, infiltration, hot water, lighting, and equipment schedules;
- Modeling infiltration per ACM Section 2.4.1.6;
- Luminaire power for interior lighting systems derived from manufacturer data from the 2005 California Title 24 Nonresidential ACM Appendix NB.
Let Us Help You
Doubts regarding the claiming and computation process of Section 179D deduction are common. Contact the National Tax Group for correct guidance and to understand how these changes can impact your company.