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Energy Efficient Incentives for New Construction and Renovation

The Inflation Reduction Act of 2022 (IRA) updated and reinstated several notable credits and deductions related to Solar and Energy efficiency. Construction of new residential or commercial structures are ideal candidates for these tax savings but they do not preclude existing structures being renovated. Below are a few notable tax considerations.

179D Deduction

179D is an option to accelerate the cost recovery of a commercial building, provided it satisfies certain energy efficiency standards, and is certified by a qualified third party. The deduction applies to owners or lessees of commercial buildings who make energy efficient improvements to building envelopes, interior lighting, and HVAC systems. For 2022, the deduction is $0.63 per square foot (up to $1.88 per square foot if prevailing wages were paid), not to exceed the total amount of deductions taken for the three years prior to energy certification. The IRA has increased the amount of the 179D deduction up to between $2.50 to $5.00/sq. ft. – based on a sliding scale of eligibility contingent on the level of energy savings and whether prevailing wages were paid. To claim the maximum deduction, the project must meet the prevailing wage requirement and have at least a 50% reduction in annual energy costs, compared to the listed standards. As of the time of this writing the prevailing wage requirements have not yet been officially published. The IRA also allows for a deduction reset, and can now be taken every three years provided additional energy efficient improvements were made. Note that the depreciable basis of the building needs to be reduced by the amount of 179D deduction claimed.

45L Tax Credit

The 45L tax credit, also known as the “Energy Efficient Homes Credit” is a credit available to contractors on buildings meeting certain energy efficient standards sold or leased after December 31, 2005. For 2022, residential buildings three stories or less are eligible for a credit of up to $2,000 per dwelling unit. For 2023-2032, all residential buildings are eligible, provided they meet the energy saving standards, for a credit of $500-$5,000 depending on the level of energy efficiency and type of structure. The credit also applies to buildings that have undergone significant rehabilitation. To claim this credit, an energy analysis must be performed by a certified third party.

As these credits require specific parameters it is prudent to contact your TBC tax advisor for further information on whether these credits or other opportunities are available to you or your business.

By: Heather Mallette, CPA, Supervisor