Expanding energy efficiency incentives with the IRA

Accounting

Under the Inflation Reduction Act, both existing and expired energy efficiency tax incentives for commercial and multifamily building owners, investors, developers and homebuilders have been expanded significantly.  

Increase and expansion of 179D tax deduction

The already permanent Section 179D tax deduction has been significantly increased from the current maximum of $1.88 per square foot in 2022 to $5 per square foot to reward the construction of energy-efficient commercial buildings, including multifamily buildings that are four stories or taller. Energy-efficient ground-up construction, along with energy efficient retrofits of older buildings, will be eligible. Furthermore, real estate investment trusts will now have the ability to utilize 179D tax deductions for purposes of computing the REIT’s earnings and profits.

Additionally, tax-exempt building owners will gain the ability to allocate 179D tax deductions to architects, engineers and designers responsible for designing a building’s energy efficient systems. Previously, only government building owners could allocate these tax deductions to their designers.

Extension, increase and expansion of 45L tax credit

Originally having expired at the end of 2021, 45L tax credits have been retroactively extended for 2022 through the end of 2032, creating significant benefits for multifamily developers and homebuilders.  

For 2022, both the existing energy efficiency criteria and the $2,000 tax credit per dwelling unit will remain unchanged.

Starting in 2023, the maximum tax credit increases to $5,000 per dwelling unit for both single-family and multifamily developments. Additionally, the energy efficiency criteria changes to align with Department of Energy programs for Energy Star and zero energy ready homes. As a result, all residential developments become eligible, whereas previously only low-rise residential developments were eligible.

In some cases, maximizing the energy efficiency tax incentives within this legislation will require that construction wages for the project be paid at or above local prevailing rates as determined by the Secretary of Labor.  

Additionally, with 45L tax credits now being applicable to all multifamily developments, midrise and high-rise multifamily projects can now qualify for both 179D tax deductions and 45L tax credits.  

With this legislation, Congress has made it clear that it intends to combat climate change by significantly expanding energy efficiency tax incentives across the board and making more parties eligible to partake in these incentives than ever before.

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