Post-IRA 179D
The 179D Tax Deduction allows energy-efficient building improvements or new building construction to be eligible for a tax deduction. Prior to 2023, the deduction was up to $1.80 per square foot (indexed for inflation). Properties placed in service after December 31, 2022, may be eligible for a tax deduction of up to $1.00 per square foot. These can increase to $5.00 per square foot if prevailing wage requirements are met.
Earning the Maximum Deduction
Under the new requirements, a building qualifies for a $0.50/sqft deduction if the property reduces energy consumption by 25% as compared to the reference standard. If the property reduces energy consumption by 50%, the building qualifies for $1/sqft. If the property meets prevailing wage requirements, the deduction increases to a maximum of $5.00 per square foot. However, there is a safe harbor for property that begins construction prior to 1/30/2023.
Under the new regulations, there are also new guidelines that allow properties to complete studies after a renovation by comparing the energy consumption before and after the renovation. This will allow older buildings to qualify for a deduction that might have been missed out on in the past. The following types of facilities commonly benefit from 179D:
- Apartments (four stories and higher)
- Manufacturing facilities
- Hotels
- Data centers
- Office buildings
- Auto dealerships
- Warehouses
- Distribution centers
Post-IRA 45L
The 45L Energy Efficient Home Tax Credit allows newly constructed or renovated residential facilities that meet Energy Star requirements to be eligible for a tax credit. The 45L Tax Credit varies depending on the type of property. To qualify properties occupied after 12/31/2022, the building must be Energy Star certified. Energy Star certification has detailed requirements that must be started early in the design/build process. It is necessary that a pre-drywall inspection be performed.
Credit amounts include:
- Single-family homes meeting Energy Star Single-family Home Standard – $2,500
- Single-family homes certified as Zero Energy Ready – $5,000
- Multifamily homes meeting Energy Star Multi-family New Construction – $500*
- Multifamily homes meeting Energy Star Zero Energy Ready Multi-family – $1,000*
*Multi-family homes receive a 500% increase if prevailing wage requirements are met
How McGuire Sponsel Can Help
Alternative energy sources are growing and gaining interest, but there are many complicated issues surrounding the planning and execution of these projects. The profitability and viability of alternative energy projects hinges on understanding the tax incentive surrounding projects. McGuire Sponsel can help interpret 179D tax deductions and 45L energy inclusions, manage local incentives, perform site analyses, set up power purchase agreements, and assist with other complex issues.
What makes a great prospect post-IRA?
179D
– New builds or renovations in excess of 30,000 square feet
– Architects or systems engineers that design buildings owned by government or tax-exempt entities
45L
– Newly constructed residential facilities with Energy Star certification