Inflation Reduction Act of 2022 makes Major Changes to §179D and §45L Energy Tax Incentives.

We are excited to announce that the Inflation Reduction Act (IRA) of 2022 has drastically improved and expanded §179D Energy Efficient Commercial Building Tax Deduction and Extended and increased the §45L Tax Credit for Energy Efficient Homes. The new bill signed into law is full of exciting opportunities for energy-efficient buildings and homes!

A brief highlight of the changes and opportunities are as such:

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§179D Energy Efficient Commercial Building Tax Deduction

The current version of §179D will remain in effect for properties placed in service in 2022, currently, you can achieve up to $1.88/SF (expected to increase up to  $2.00/SF with current inflation adjustment provisions that are in place), the major improvements to the §179D are the following:

• Energy efficient commercial buildings placed in service after January 1, 2023, will have the opportunity to qualify under IRA provisions and increase the §179D from $1.88/SF to $5.00/SF. This is exciting news for the energy-efficient commercial building industry!

• Designers of energy-efficient commercial buildings, such as Architects, Engineers, Design Build Contractors, Energy Service Companies, and Performance Contractors, can now have tax-exempt building owners, including tribal governments to also allocate the §179D Tax Deduction to them in addition to government-owned buildings.

• A special provision for performance-based qualification methodology will be enacted for retrofitting commercial buildings.

• Commercial buildings will be able to be certified and claimed once every three years if privately owned and once every four years if government owned and allocated to the designer.

The qualification criteria changes that will be effective for properties placed in service from January 1st, 2023 through December 31st, 2032 are as follows:

• For projects meeting the prevailing wage requirements, energy reduction standards will change as follows; 50% reduction against the ASHRAE standard will now be 25% and will yield a §179D Tax Deduction of $2.50/SF and for every 1% of additional reduction above 25% it will provide an additional $0.10/SF of deduction up to $5.00/SF

• For buildings that DO NOT MEET the prevailing wage requirements, energy reduction standards will change as follows; 50% reduction against the ASHRAE standard will now be 25% and will yield a §179D Tax Deduction of $0.50/SF and for every 1% of additional reduction above 25% it will provide an additional $0.02/SF of deduction up to $1.00/SF

• ASHRAE standards to be used for qualifications shall be the ASHRAE standard that was affirmed four years prior to the dates in which the commercial building property was placed into service.

• A New qualified retrofit plan for actual performance-based qualification will be in place. Actual guidelines on how this program will work will be released in the future by the DOE/Secretary

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§45L Tax Credit for Energy Efficient Homes

The current version of §45L which includes a $2,000.00 per unit, has been extended for residential homes or apartments placed in service through December 31, 2022. This is a great opportunity to take advantage of any new homes built this year and will be the last year in which home and apartment builders and developers can take advantage of the current qualification guidelines. We highly recommend moving forward swiftly on any projects that were placed in service in 2022, as the qualification standards beyond 2022 will be much more difficult to qualify for.

The §45L Tax Credit was also extended through 2032, with major changes to the qualifying standards, set to begin in 2023. New homes certified under the ENERGY STAR Residential New Construction or the ENERGY STAR Manufactured New Homes programs sold or rented after December 31, 2022, will be eligible for a $2,500.00 tax credit. This credit jumps to $5,000.00 if the units are certified under the Zero Energy Ready Homes Program (ZER).
Dwellings certified under the ENERGY STAR Multifamily New Construction National Program will also be eligible for these benefits, including high-rise projects, though the amount of the credit will be reduced if Davis-Bacon’s prevailing wage requirements are not followed. These credits remain in effect through 2032.

Walker Reid is excited about the upcoming changes and we are looking forward to working with our clients to help get any 2022 projects qualified and certified before any major changes take effect in 2023.

If you have any questions, concerns, or would like to discuss how we can get your projects certified please contact us today to schedule a call.

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