by Drew Mansell, CPA
The Inflation Reduction Act (IRA) increased the potential benefit of several energy efficiency tax incentives. These include the Section 179D energy efficient commercial buildings deduction and the Section 45L new energy efficient home credit. A more detailed description of these incentives is below. These changes warrant a renewed look at these incentives by companies looking to build or remodel real property.
The Inflation Reduction Act’s stated goals include reducing carbon emissions and encouraging domestic energy production and manufacturing. The law introduces and expands existing tax incentives available for those investing in clean energy projects. It also increased the time horizon for these incentives, in many cases by up to 10 years.
Importance of Extension
Many tax credits and incentives available have limited time horizons, often requiring annual renewal by congress. This has caused uncertainty about their benefits, especially in industries where projects typically take multiple years to complete. With the extension of these incentives for the next ten years, that uncertainty is eliminated and developers can build these incentives into project costs for the foreseeable future.
Tax Incentives to Watch
|New Energy Efficient Home Credit (IRC Sec. 45L)
|A $2,000 credit per single family residential housing unit. Available to multifamily developers, investors, and construction companies that build energy efficient properties sold or leased through Dec. 31, 2022. Increased to $2,500 per unit under Energy Star and $5,000 per unit under the Zero Energy Ready Homes program from Jan. 1, 2023, through Dec. 31, 2032.
|Energy Efficient Commercial Buildings Deduction (IRC Sec. 179D)
|Deduction available to building owners for installing qualifying energy systems. The deduction can be up to $1.88 per sq. ft. through Dec. 31, 2022 and increases up to $5.00 per sq. ft. beginning in 2023 if the project meets prevailing wage, and apprenticeship requirements. See below.
The Feasibility Study
Real estate and construction companies should discuss these incentives with their tax advisors who can connect them with experts to determine project feasibility. These professionals, usually engineers, evaluate a company’s projects and consider incentives that are likely applicable. The study can be used to make businesses decisions about next steps.
A feasibility analysis can follow five simple steps:
- Consider the project’s goals. Look into intended investments your company plans to make for its building project.
- Split investments up into distinct groups. Section off relevant investments into qualifying and nonqualifying categories.
- Match investments to potential IRA incentives. Compare the list of planned investments with the list of available tax incentives and determine overlap.
- Conduct a cost-benefit analysis of implementing a tax incentive. Calculate the degree of investment required to achieve eligibility and the return on investment the tax incentives would offer.
- Identify requirements to substantiate claims to incentives. Pull together the documentation required to prove existing or intended adherence to tax incentive requirements.
Prevailing Wage & Apprenticeship Requirements
A key hurdle to qualify for these incentives are the prevailing wage and apprenticeship requirements. Companies must pay workers wages and benefits that meets standards for their geographical area set by the government. A certain portion of the labor on each project must also be performed by certified apprentices. It is important to understand these requirements before beginning a project. A feasibility study could include an analysis of these requirements and whether adjustments would be required to meet them.
These incentives have often been overlooked by taxpayers and practitioners alike due to their relatively minor potential benefits and complex rules to navigate. However, after the “remodel” of these incentives in the IRA, they deserve another look. We recommend reaching out to Harris or your preferred advisor if you think a project in your pipeline could qualify for one of these incentives.
Full Magazine Issue here: https://www.idahoagc.org/blog/spring-2023-buildingidaho
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