by Geoff Garber, Partner, BRAYN Consulting
Just when everyone thought that the Build Back Better Act was dead, Senate leadership has revived parts of the controversial legislative package. Senators Chuck Schumer and Joe Manchin struck an unexpected deal last Wednesday that includes energy, health, and tax policy. The deal is known as The Inflation Reduction Act of 2022 (“the IRA”) and, according to the senators, it will “fight inflation, invest in domestic energy production and manufacturing, and reduce carbon emissions by roughly 40 percent by 2030.” The Senate is poised to vote on the legislation this week, with the House likely to vote in the coming weeks once it returns from recess. This article will focus on the energy efficient tax policy aspects of the IRA, specifically the implications for the 45L New Energy Efficient Home Credit (“45L”) and the 179D Energy Efficient Commercial Building Deduction (“179D”).
45L Tax Credit
Congress passed the original 45L Tax Credit legislation in 2005 and has extended it multiple times since enactment. 45L provides a $2,000 tax credit per energy efficient home or apartment under 4 stories and goes to the builder or developer having basis in the property during construction.
If passed, the IRA would make significant changes to the 45L credit amount and qualification criteria, with some criteria unrelated to the energy efficiency of the property. Here is a quick rundown on some of the major changes:
- 45L EXTENSION: 45L would be extended as is for dwelling units acquired (first sold or leased) after December 31, 2021 through December 31, 2022. 45L would be extended with modifications (highlighted below) from January 1, 2023 through December 31, 2032.
All other 45L changes mentioned below apply ONLY to dwellings acquired after December 31, 2022
- Credit Amounts
- Base qualification of single-family homes and manufactured homes increases to $2,500
- Zero Energy Ready single-family homes and manufactured homes is $5,000
- Base qualification of multifamily units decreases to $500
- Zero Energy Ready multifamily units are $1,000 each
- For multifamily units meeting prevailing wage requirements, the credit increases to $2,500 for base qualification and $5,000 for Zero Energy Ready
- 45L would transition to Energy Star as the primary qualification criteria beginning in 2023, departing from the 2006 International Energy Conservation Code standard that has been in place for years. Below is a breakdown of the criteria for all qualified dwelling types.
Single-Family Homes Base Qualification
Must meet BOTH National and Local Requirements
|Acquisition Date||National Energy Star Program||Local Energy Star Program|
|January 1, 2023 – December 31, 2024||Energy Star Single-Family New Homes National Program Requirements 3.1||Energy Star Single-Family New Homes Program Requirements applicable to the location of such dwelling unit (as in effect on the latter of January 1, 2023, or January 1 of two calendar years prior to the date the dwelling unit was acquired)|
|January 1, 2025 – December 31, 2032||Energy Star Single-Family New Homes National Program Requirements 3.2||Energy Star Single-Family New Homes Program Requirements applicable to the location of such dwelling unit (as in effect on the latter of January 1, 2023, or January 1 of two calendar years prior to the date the dwelling unit was acquired)|
Manufactured Homes Base Qualification
Only National Requirements
|Acquisition Date||National Energy Star Program|
|January 1, 2023 – December 31, 2032||Energy Star Manufactured Home National program requirements as in effect on the latter of January 1, 2023 or January 1 of two calendar years prior to the date such dwelling unit is acquired|
Multifamily Base Qualification
Must meet BOTH National and Local Requirements
|Acquisition Date||National Energy Star Program||Local Energy Star Programming|
|January 1, 2023 – December 31, 2032||Multifamily New Construction National Program Requirements (as in effect on either January 1, 2023 or January 1 of three calendar years prior to the date the dwelling was acquired, whichever is later)||Energy Star Multifamily New Construction Regional Program Requirements applicable to the location of such dwelling unit (as in effect on either January 1, 2023 or January 1 of three calendar years prior to the date the dwelling was acquired, whichever is later)|
- Basis adjustment for LIHTC projects:
- Section 42 Low income Housing Tax Credit (LIHTC) projects are not required to take the 45L tax credit into account when computing the adjusted basis of buildings subject to LIHTC credits.
- PRACTICE TIP: This is potentially a huge benefit for developers of LIHTC projects given that many owners have chosen not to claim 45L in prior years due to the corresponding reduction of the LIHTC upon basis reduction.
- Prevailing wage requirements
- For the additional multifamily credit benefits, eligible claimants must ensure that any laborers and mechanics employed by contractors and subcontractors are paid not less than the prevailing rates for similar construction, alteration, and repair in the locality
- We expect that the Treasury Department would issue regulations related to this section given how little guidance exists
In all, this would be a huge win for the home builders and multifamily developers, providing additional credit amounts and certainty for years to come. As a registered Energy Star® partner, the team at BRAYN stands ready to help guide you through this changing regulatory environment. Contact us today for a complimentary analysis of your technical specifications to see what changes may be required for qualification for 45L in 2023 and beyond.
Congress passed the original 179D legislation in 2005 and recently made the deduction permanent via the Consolidated Appropriations Act, 2021. 179D currently provides a deduction of up to $1.87/SF in 2022 for owners of privately-owned energy efficient properties (accelerated depreciation), as well as designers of government-owned properties (windfall “other deduction”).
If passed, the IRA would significantly change the 179D deduction amounts and qualification criteria. The biggest change is that the deduction amount will now be based on two prongs: 1) the amount of energy savings compared to the ASHRAE 90.1 Standard and 2) certain prevailing wage and apprenticeship requirements. Here is a quick rundown on some of the major changes highlighting existing law vs new law based on placed in service (“PIS”) date:
|179D Provision||Existing Law PIS Date Before 1/1/2023||IRA Changes PIS Date Starting After 12/31/2022|
|Maximum amount of deduction||$1.80 times square footage, subject to cost-of-living adjustment||Up to either $1.00/SF or $5.00/SF. The applicable dollar value times the square footage, subject to cost-of-living adjustment. The applicable dollar value is equal to $0.50, increased (but not above $1.00) by $0.02 for each percentage point by which the total annual energy and power costs for the building are certified to be reduced by a percentage greater than 25 percent. These amounts are increased from $0.50 to $2.50 and from $0.02 to $0.10 for any energy efficient commercial building property, energy efficient building retrofit property, or property installed pursuant to a qualified retrofit plan if certain apprenticeship and prevailing wage requirements are met.|
|Energy efficient commercial building||Property certified as having reduced the energy and power costs of the building by 50 percent or more in comparison to a reference building||Property certified as having reduced the energy and power costs of the building by 25 percent or more in comparison to a reference building|
|Reference building standard||The most recent ASHRAE Standard 90.1 affirmed by the Secretary not later than the date 2 years before construction begins||The most recent ASHRAE Standard 90.1 affirmed by the Secretary not later than the date 4 years before such property is placed in service|
|Partial allowance||$0.60 per qualified system||Eliminated|
|Entites that can allocate the deduction||Federal, State, or local government or a political subdivision thereof||Federal, State, or local government or a political subdivision thereof PLUS Indian tribal governments, Alaska Native Corporations, and any organization exempt from the tax imposed under this chapter|
|Interim lighting rules||Reduction in lighting power density of 25 percent (50 percent in the case of a warehouse) of the minimum requirements||Eliminated|
|Alternative deduction for qualified retrofit property||N/A||A written plan prepared by a qualified professional expected to reduce energy use by 25 percent or more with a maximum deduction amount similar to the standard 179D deduction. More details on this to follow.|
|Inflation adjustment||Cost of living adjustment under 1(f)(3) determined by substituting “calendar year 2019” for calendar year 2016 in subparagraph (A)(ii)||Cost of living adjustment under 1(f)(3) determined by substituting “calendar year 2021” for calendar year 2016 in subparagraph (A)(ii)|
The apprenticeship and prevailing wage requirements for the increased deduction amount would create a massive incentive for claimants to meet them. If not met, the maximum deduction would drop from $1.80/SF to $1.00/SF (adjusted for inflation), while the deduction would grow to almost 3 times the existing rate at $5.00/SF if met. There will be record-keeping requirements to establish that claimants meet these conditions, and the IRS will impose penalties on those who fail to meet the requirements but still claim the increased deduction.
BRAYN is a team of lawyers, accountants, and engineers dedicated to supporting CPAs and their clients with specialty tax incentives like 45L and 179D. We are preparing for these changes and advising our clients and prospects accordingly. If you are curious about 45L or 179D or would like to know more about how this legislation might impact you and your clients, please reach out to schedule some time to discuss.
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