Inflation Reduction Act (IRA) Frequently Asked Questions on the 45L Credit and 179D Deduction
The Inflation Reduction Act (IRA) of 2022 was signed into law in August 2022. The act provides incentives for the construction and renovation of energy-efficient buildings. If you’re a builder and are in the new construction phase or renovation phase of existing buildings, the IRA’s green building tax incentives will impact you directly. This FAQ section covers changes to the 45L tax credit, 179D building deduction, and more.
45L Tax Credit: Frequently Asked Questions
Section 45L is a Federal Tax Credit that offers general contractors/builders a means to offset the costs associated with building energy-efficient single-family or multifamily properties. It rewards builders of energy-efficient residential construction by providing a tax credit to buildings that meet certain energy efficiency requirements.
In the revised plan (starting January 1, 2023, through the end of 2032) builders can take both 45L and Low-Income Housing Tax Credit (LIHTC), the plan includes a 45L maximum credit increase and more…
Who can claim the 45L tax credit?
The qualified contractor – typically the developer, builder, or homeowner is the only person who can claim the 45L tax credit and must own the unit at the time of construction or improvement.
What builders are eligible?
Any ENERGY STAR registered builder qualifies. Becoming an ENERGY STAR partner is easy. Simply fill out an ENERGY STAR Partnership Agreement in this link. There is no cost to partner with ENERGY STAR or use ENERGY STAR promotional materials.
What modeling software is approved by the IRS?
Certified third-party IRS-approved modeling software: Ekotrope, REM/RATE, EnergyGuage, EnergyPro, and Micropas
What are the requirements of DOE zero-energy ready?
DOE zero-energy ready includes Indoor airPlus and ENERGY STAR certification as a baseline but more stringent requirements for most components.
Can builders claim both the 45L and the Low-Income Housing Tax Credit (LIHTC)?
For affordable housing, new credits do not reduce LIHTC basis, allowing developers to take both 45L and LIHTC.
Does ENERGY STAR Increase the appraisal value of the home?
Green homes typically sell faster and for more money than homes without energy-efficient certifications.
What types of construction are eligible for 45L?
Newly constructed homes or substantially renovated single-family detached, duplexes, townhouses, apartments, and condominiums are all eligible for the tax credit. Even occupancies such as assisted living and student housing projects are eligible. Market rate, affordable housing, and condominiums are all eligible.
What about multifamily projects that are 4 or more stories high?
Project 4 stories and higher can now qualify for the 45L. Previously restricted to multifamily buildings three stories or less, the updates would make it accessible to all multifamily at $2,500/$5,000 per unit with prevailing wage requirements.
What are prevailing wage requirements?
Prevailing wages are calculated based on local economies, so you need to consult this website to determine what they are for your area. Link: Davis Bacon Wage Rate Determination–Office of Construction & Facilities Management (va.gov).
Can manufactured homes qualify?
Manufactured homes can qualify for a $1,000 credit if they meet ENERGY STAR Labeled Home requirements.
How have the existing 45L tax credits been expanded?
The tax credit increased from $2,000 currently (2021) for meeting outdated IECC reference to $2,500 for meeting ENERGY STAR and $5,000 for DOE Zero-Energy ready.
How can the sampling protocol save you money?
Sampling is a process by which only a certain quantity of randomly selected dwelling units are fully tested and verified. A typical project will see roughly 20% of the units sampled which greatly reduces the costs of testing and verification. This applies to multifamily buildings as well as multi-unit developments and production building. See Chapter 6 in this link to learn more about the sampling protocol.
179D Tax deduction: Frequently Asked Questions
Section 179D is a Federal Tax Credit that offers commercial building owners and primary designers of public building projects, that incorporate certain sustainable building components, the ability to qualify for the deduction.
Originally passed by Congress in 2005, it allows qualifying building owners and businesses to receive a tax deduction for a new or remodeled commercial building.
179D will run in its current form through 2022. Starting January 1, 2023, the revised plan includes a tax deduction increase, new eligibility for REITS, and more.
Who can claim 179D?
An architect, engineer, and contractors who work on new or renovated commercial buildings. (This includes multifamily buildings 4-stories and higher.)
What are the eligible building systems?
Eligible building systems include the building envelope, interior lighting systems, heating, cooling, ventilation, and hot water systems.
Can tax-exempt entities claim a 179D deduction?
The new plan expands the allocation option to be used by tribal government projects and projects by nonprofits. So tax-exempt entities such as tribal projects and nonprofits can now allocate deductions to contractors, engineers, and architects responsible for the design components.
Who qualifies as the primary designer?
The primary designer is the person who creates the technical specifications for the installation of energy-efficient commercial building property. The primary designer may be an architect, engineer, contractor, environmental consultant, or energy services provider.
Are Real Estate Investment Trusts (REITs) eligible?
New provisions expand eligibility so yes, REITs can now take advantage of 179D deductions in calculating earnings and profits.
Can government-owned buildings qualify?
Government-owned buildings at the local, state, and federal levels might qualify for a Section 179D tax deduction. These buildings include: Schools, post offices, state universities, libraries, town halls, institutions, government offices, courthouses, military bases, airports, and transportation facilities.
Who claims the 179D deduction?
The company or person that makes the expenditures for construction is generally the recipient of the 179D deduction.
What are the approved energy modeling programs?
Here is a list of qualified software programs for calculating building energy and power cost savings.
Can a multifamily building 4 stories or higher claim both the 45L tax credit and 179D tax deduction?
The Inflation Reduction Act does not specifically say the two incentives are mutually exclusive, but as of this writing, the final rules have not been published. We expect projects will be able to claim both.
Visit How to Get the Most from the Inflation Reduction Act (IRA) to learn more.
We can help with residential projects seeking 45L (including multifamily of any height). For commercial buildings, we can refer you to a trusted partner to help you with that.
Ready to get the most from federal tax incentives?
Don’t leave money on the table! Partner with Green Insight and we will guide you through the entire process. Our 3 Phase process helps us ensure you meet the criteria to take advantage of the IRS tax credits available to you.
A complimentary review of the drawings or property which includes guidance to meet the requirements of the 45L Tax Credit and estimated incentive.
Low-cost modeling of worst-case units with IRS-approved software and exploration of reducing construction costs.
Cost estimate to provide Green Building Program Certification and testing requirements during construction.
Contact us today to discuss how we can help you build greener while getting money back.
Or grab your FREE guide, “How to Get the Most from the Inflation Reduction Act.”
This applies to residential projects seeking 45L (including multi-family of any height). For commercial buildings, we can refer you to a trusted partner who can help you with that.
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