INDUSTRY HIGHLIGHT

When The Inflation Reduction Act( IRA) was passed in 2022, one key focus area centered around climate change, creating tax incentives for home builders and multifamily developers constructing energy efficient homes. As you design and build for your business, here are some tax incentives to keep in mind.

45L Tax Credit

The IRA extended the 45L tax credit through 2032 and provides eligible contractors with a business tax credit for eligible new or substantially reconstructed homes that meet applicable ENERGY STAR home program or the Department of Energy’ s( DOE) Zero Energy Ready Home( ZERH) program requirements. The amended 45L tax credit applies to qualified new energy efficient homes acquired after Dec. 31, 2022, and before Jan. 1, 2033, and may be claimed for the taxable year in which the home or dwelling unit was acquired for use as a residence.

ENERGY STAR $ 2,500 $ 2,500 $ 500 $ 2,500

ZERH-CERTIFIED HOMES $ 5,000 $ 5,000 $ 1,000 $ 5,000

Section 179D Deduction

The 179D deduction, also known as the energy efficient commercial buildings deduction, had some significant changes in the deduction amounts and qualifying criteria, thanks to the IRA. Plus, the deduction is now allocable to architects, engineers and designers responsible for designing a building’ s energy efficient systems.

Under the IRA, the deduction amount was increased from $ 1.88 / SF to $ 5.00 / SF beginning on Jan. 1, 2023. However, the construction company must ensure the project work was performed by a qualified apprentice who:

• Completed a registered apprenticeship program.

• Meets the apprenticeship requirements outlined in the“ Apprenticeship Labor Hour Requirements.”

The apprenticeship and prevailing wage requirements for the increased deduction amount creates a massive incentive for claimants who 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 three times the existing rate at $ 5.00 / SF, if met. This is calculated by the applicable dollar value times the square footage, subject to the cost-of-living adjustment. Then, the applicable dollar value is equal to $ 0.50, increased by $ 0.02( but not above $ 1.00) 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 %.

Keep in mind, the 179D deduction will reduce the depreciable basis of the building. Additionally, because it is treated as depreciation, the 179D deduction may be subject to recapture rules upon the sale of the building.

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