Despite the uncertain economic conditions in the future, the Infrastructure Investment Jobs Act (IIJA) and the Inflation Reduction Act (IRA) for energy-efficient interior lighting renovations can provide good relief to for-profit and nonprofit organizations. Not only are the improvements financially feasible, but better lighting systems also save money as they have lower running expenses with less maintenance.
The IRA offers $400 billion in federal support for reducing carbon emissions from clean energy. Over the next five years, the IIJA will allocate $550 billion in federal money for various infrastructure projects, many of which involve lighting, such as bridges, tunnels, highways, railway upgrades, and more.
Let’s understand the implications of these Acts on lighting upgrades and how you should navigate your claim for available benefits and deductions.
What does IRA offer?
The IRA is important for several reasons, not the least of which is that it provides hitherto unattainable tax credit-driven investment and development opportunities for tax-exempt organizations, including hospitals, K–12 school systems, and universities. Prior to the passage of this statute, tax credits were often only available to organizations, such as for-profit businesses, that had taxable revenue to offset.
The IRA changed the game for tax-exempt businesses by providing a novel direct pay clause that permits them to capitalize on relevant tax benefits. Now, earned tax credits can be treated as a ‘overpayment of taxes’ by exempt organizations, and they can get a direct payment as a tax refund from the U.S. Treasury.
The IRA direct pay option removes a long-standing barrier to tax-exempt companies engaging in climate-friendly actions that these credits promote. Because tax-exempt organizations typically have little or no tax to balance against tax credits, it was more expensive for them than for-profit taxpayers to take advantage of energy-saving devices prior to the IRA’s direct pay option.
Scope with IIJA
Another equally important statute, the IIJA, provides $550 billion in federal spending over the next five years specifically for tax-exempt organizations. The historic investments are helping schools and tax-exempt organizations with vital energy upgrades, as well as supporting initiatives ranging from broadband to clean energy. They are fundamentally redefining American infrastructure.
Eligibility and Incentives
The Section 179D Energy Efficient Commercial Buildings Tax Deduction is now available to corporations and tax-exempt organizations for energy-efficient renovations. Companies can employ tax credits in addition to Section 179D deductions for renovations or building projects. Building owners are specifically permitted to deduct the Investment Tax Credit (ITC) under Section 148 from their tax obligations.
As an alternative deduction for energy-efficient building retrofits, the IRA created a new elective retrofit program that must be taken during the qualifying final certification year. The alternative deduction is centered on energy consumption intensity rather than total yearly energy and power costs, and it calls for an approved retrofit plan. The aggregate adjusted basis of retrofit property put into service cannot be more than the alternative deduction.
Both new building and renovation projects that your clients are considering are eligible for the 179D deduction. New hospital wings or school libraries are examples of additions that qualify based simply on their own efficiency, not the efficiency of the entire/existing building. The deduction is always determined by the project’s overall efficiency because the partial deduction for the individual systems was eliminated by the 179D IRA modifications.
Lighting Upgrades
Enhancing the energy efficiency of a building results in long-term financial benefits. However, upgrades can occasionally be expensive. Owners and designers of commercial real estate now have more incentives to choose from when completing energy-efficient renovations thanks to the IRA’s passage. Although replacing outdated metal halide interior lighting fixtures with new, energy-efficient LED fixtures can save energy and money (by over 60%), as well as lower maintenance costs and overall facility heat, there are even more benefits to pursuing these projects, including tax breaks and rebates from the 179D Deduction and IRA.
Qualified buildings:
- Storage facilities
- Retail spaces
- Hotels
- Office buildings
- Parking garages
- High-rise multi-family buildings
- Car dealerships
- Logistics centers
- Data centers
- Business chains
Retrofits are eligible if they can show a 25% reduction in energy consumption intensity (in BTUs) over the building that was not retrofitted. The facility needs to be in operation for a minimum of five years prior to creating this certified retrofit plan. In order to qualify, the deduction must be made in the year of final certification.
The updated tax code provides a compelling incentive to upgrade old structures and increase energy efficiency in new construction. It encourages the most sophisticated control options and more intricate design in new construction. It encourages a variety of lighting and sophisticated control options in already-existing buildings, which, when combined with utility subsidies, can significantly lower the initial cost. This is the biggest deterrent to investing in energy efficiency to lower running expenses.
Available Funding Options
The IRA offers a multitude of tax credit opportunities, even for tax-exempt organizations. Organizations have other resources to help defray the expenses of energy upgrades, new construction, and renovations in addition to these tax incentives and the IRA’s modifications to the 179D Energy Efficient Commercial Buildings Tax Deduction. Here are several funding alternatives, sorted by tax-exempt and/or for-profit nature, from the IIJA as well as the IRA.
For Tax-Exempt Organizations:
- Nonprofit Energy Efficiency Materials Pilot Program (IIJA Sec. 40542)
- Grants for Energy Efficiency Improvements and Renewable Energy Improvements at Public School Facilities (IIJA Sec. 40541)
- Public School Facilities Grants (IIJA Sec. 40541)
- Renew America’s School grant program
For-Profit Organizations
When Should You Upgrade to Be Eligible for Deductions
- Energy-efficient upgrading projects must start before December 31, 2024, and end by December 31, 2028.
- The project must be carbon neutral if it begins after December 31, 2024, or ends after December 31, 2028.
- Application timelines differ for project evaluation for grants or loans due to the different government bodies in charge of managing these.
Get the NTG Advantage
Even though these tax updates can be difficult to understand, being aware of the IRA and IIJA and how they can be used to update your clients’ lighting presents you as a reliable resource. With these tax breaks and federal funding opportunities acting as catalysts, now is the ideal moment to start planning future initiatives.
We have assisted many companies across many different industries in obtaining these credits by creating and providing the needed documentation while walking through all your company’s activities. Contact us to set up your free assessment with our tax specialists today.