Tax Alert: The Inflation Reduction Act (IRA) may bring big savings. Learn more.

Tax Deduction  --  December 16, 2022

The Inflation Reduction Act (IRA) may bring big savings

The Inflation Reduction Act (“IRA”) may impact clients of Green Donation Consultants (“GDC”). This article is not tax advice, as eligibility should be determined by a tax professional. The IRA provides incentives to replace certain building materials, appliances, fixtures, and other reusable items. GDC provides appraisals for individuals and businesses that donate property to non-profits for reuse. These items include but are not limited to appliances, brick and wood, furniture, fixtures, etc. The IRA was signed into law on August 16, 2022. It’s the largest energy and climate change investment in U.S. history at $369 billion. It includes incentives to replace older, “less green” infrastructure with cleaner, more energy efficient options.

The IRA provides incentives for commercial building owners to engage in “deep energy retrofits” by granting accelerated tax deductions for building via Section 179D.1. If the taxpayer qualifies, a large portion of that deduction may be taken in the first year. Starting January 1, 2023: The new legislation will raise the deduction value from a maximum of $1.88 per square foot to up to $5.00 per square foot. Buildings that improve energy efficiency by 25% (previously 50% was required) qualify for a deduction, which increases for each percentage point above the 25% benchmark. Tax-exempt building owners may allocate deductions to architects, engineers, and contractors designing energy efficient systems. Previously, only government building owners could do this.

The IRA allows deductions for energy efficient lighting, HVAC, and building envelope costs placed in service as part of a retrofit. The value of the deduction depends on the energy saved. Similarly, the IRA provides grants to states for adopting residential and commercial building energy codes. Section 45L (26 U.S.C. § 45L), titled “New energy efficient home credit,” provides incentives for residential home builders and multi-family developers to reduce energy consumption by offering a per dwelling unit tax credit. The period to claim it extends through 2032. Beginning in 2023, the IRA provides an increased 45L tax credit of $25,000 for single family and manufactured homes when constructed according to ENERGY STAR standards. Note the term “construction,” is defined as “substantial reconstruction and rehabilitation.” The Act also provides a higher 45L tax credit of $5,000 for single family and manufactured homes when certified as a DOE Zero Energy Ready Home (ZERH). For multifamily homes constructed after 2022, the Act provides a 45L tax credit of $500 when meeting the ENERGY STAR requirements or $1,000 when meeting the DOE Zero Energy Ready Home requirements. If prevailing wage requirements are also satisfied, the credits increase to $2,500 or $5,000, respectively.

The IRA includes $837.5 million for the U.S. Department of Housing and Urban Development to provide grants/loans to affordable housing owners (Section 202, Section 811, Project-based Section 8, and Section 236 properties) that implement energy or water efficiency; indoor air quality or sustainability; zero-emission electricity generation or low emission building materials or processes; building electrification; and climate resilience. Furthermore, the U.S. Department of Energy has $4.3 billion available through 2031 for state energy offices to provide rebates for energy efficient retrofits that achieve verifiable minimum energy use reductions. Eligible recipients include homeowners, multifamily building owners and aggregators who undertake whole-house energy efficiency retrofit projects with modeled or measured energy use reductions. This includes rebates to cover building energy use upgrades and payments of $200 to contractors or aggregators per home located in a disadvantaged community.

Low- or moderate-income (LMI) homeowners and multifamily building owners can capitalize on electrification projects. LMI households have incomes less than 150% of the Area Median Income.

How the IRA is ultimately administered via the agencies will inform how and where the opportunities arise.

Sources:
Teri Samples, How you can claim the Inflation Reduction Act’s green building tax
incentives, WIPFLI, LLP (Aug 22, 2022)


What to Do with Your Old HVAC Equipment, Woodstock Power Company


The Inflation Reduction Act: Impact on § 45L Tax Credit, ICS Tax, LLC

National Housing Trust Policy Brief, The Inflation Reduction Act: Opportunities to Preserve and Improve Affordable Housing through Resilience

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