The Inflation Reduction Act Expands Tax Incentives For Sustainability
President Joe Biden signed the Inflation Reduction Act of 2022 (IRA) into law in August of this year. While it is under the header of inflation, the act does much more than just target the rising inflation the U.S. has seen throughout 2022. In reality, it is a wide-ranging bill that includes policies aimed at reducing the government deficit, improving healthcare, kickstarting investment in domestic manufacturing and energy production, and reducing carbon emissions by 40% by 2030.
The IRA is a significant milestone for sustainability in the U.S. It is one of the first policies to directly state a target for reducing national emissions and provides the largest federal investment toward combating climate change in U.S. history. Out of the $433 billion of investments included in the bill, $370 billion is allocated to supporting climate-related provisions over the next 10 years.
This climate funding provides significant tax incentives for businesses and property owners that invest in sustainable initiatives. These incentives range from extending existing consumer tax credits for clean energy infrastructure to increasing tax deductions for energy-efficient commercial buildings.
Understanding the potential impacts of the IRA should be a priority for business owners. It provides an opportunity to take advantage of significant financial benefits while also achieving sustainability milestones as part of an environmental, social, and governance (ESG) strategy. For businesses that lack a robust ESG strategy, the IRA provides the perfect environment to reassess or develop an improvement plan for your buildings that incorporate the new tax incentives.
The Inflation Reduction Act's Focus on Sustainability
The IRA's energy and climate portion aims to "bring down consumer energy costs, increase American energy security, and substantially reduce greenhouse gas emissions." The Office of Management and Budget calculates that the law has the potential to save the U.S. government up to $1.9 trillion by 2050 by reducing the social and economic impacts of climate change.
This will be achieved with a focus on five different areas. Three of these categories focus on the economy as a whole and will:
Improve American energy security through increasing domestic manufacturing of clean energy and transportation technology.
Invest in disadvantaged communities to improve environmental justice and reduce disparity in climate impacts across the country. It will focus on driving sustainable development in underserved neighborhoods.
Finance conservation efforts and increase the resilience of rural communities through investments in climate-conscious agriculture methods and technologies.
The additional two categories more directly apply to consumers and business owners. The first target is to decarbonize the economy to reduce emissions from electricity generation, transportation, manufacturing, buildings, and agriculture.
Notably, this includes tax credits for clean commercial vehicles. For businesses that rely on fleet vehicles, a credit for up to $7,500 per car or $40,000 for medium/heavy-duty truck can significantly impact the bottom line.
Additionally, industrial manufacturing businesses may meet requirements for grants to upgrade their facilities to reduce emissions. Another interesting and potentially impactful output is the development of the Clean Energy and Sustainability Accelerator. This organization will be the first-ever national green bank in the United States and will provide low-cost financing for clean energy projects across the country.
The second goal is to lower consumer energy costs. This target applies to residential and commercial consumers, making it directly applicable to most individuals. In simple terms, it provides financial incentives to align with green building standard requirements, purchase clean vehicles, and invest in renewable energy infrastructure. For example, the IRA extends the existing 30% tax credit for commercial and residential solar projects.
Additionally, this portion of the IRA impacts two important tax credits that can provide significant benefits for homeowners, businesses, and developers.
Expansion of 45L & 179D Energy Efficient Tax Incentives
The 45L Energy Efficient Home Credit provides single and multifamily homebuilders, developers, and investors a federal tax credit for meeting energy savings criteria in sold or leased homes. While it officially expired in 2021, the IRA reinstated the credit for another 10 years and added a retroactive clause for sold or leased homes during the coverage gap in 2022. The IRA also added several modifications that will take effect in 2023.
A single-family home's maximum credit will increase from $2,000 to $5,000.
A multifamily project's maximum credit per unit will increase from $2,500 to $5,000.
Residential properties that exceed three stories are now eligible.
Low-income housing projects are not required to consider the 45L tax credit when computing the adjusted basis available for low-income housing tax credits.
Overall, the 45L Energy Efficiency Home credit is expanding and provides additional savings to most types of residential developments. Additionally, for low-income home builders, this change allows claiming the 45L credit and low-income housing credit, which may not have been financially viable previously.
The 179D Energy Efficient Commercial Building Deduction provides per-square-foot deductions for newly constructed or renovated commercial structures that meet energy efficiency criteria. The 179D deductions have been available since 2005, but the IRA increases deductions starting in 2023. The main changes are:
Reduces the minimum annual energy savings to qualify for 179D from 50% to 25%.
The maximum potential deduction increases from $1.88 per sq. ft to $5.00 per sq. ft based on the annual energy savings (25% to 50% of the calculated standard for the building) and if wage and apprenticeship requirements are met for workers.
The lifetime limit is removed, allowing the deduction to be claimed every three or four tax years.
"Qualified" energy-efficient building retrofits may now be eligible.
Non-profits are now included among the non-taxable entities (previously government entities only) that are able to assign the 179D to the A/E/C team.
The expanded 179D program makes the deductions more attainable for commercial building owners with lower qualifying criteria and more significant incentives.
A Major Opportunity For Not-Taxable Entities
Along with major tax incentives, the bill adds an alternative for non-taxable entities – direct payment instead of tax credits. For groups that don’t pay taxes, tax credits do not provide much benefit, which has limited the ability of these organizations to take advantage of sustainability incentives. As a result, non-taxable entities have historically been left by the wayside in environmental legislation. Now, non-taxable entities like schools and 501(c)(3) non-profits have access to a significantly larger funding pool to develop their own low-carbon energy infrastructure.
Emerald Can Help You Qualify
Whether you are a business owner, developer, or investor, the IRA likely includes tax incentives and savings for your business. The expanded Energy Efficient Tax Credits 45L and 175D are just two examples of the many opportunities in the bill. Understanding these opportunities is the first step in claiming them.
Emerald Built Environments has been following the development of the IRA and how it can impact businesses and property owners. While we don’t do tax filings, we are here to support you by helping your building qualify for tax incentives in the Inflation Reduction Act. Contact us today if you have questions about qualifying for 45L/175D or how the IRA can create savings for your business.
The Inflation Reduction Act of 2022 is one of the first policies to directly state a target for reducing national emissions, setting a goal all Americans can work towards achieving. It also is the largest federal investment to date toward combating climate change. Knowing the Federal Government cannot go it alone, the Act includes many incentives for businesses and property owners. We explain more in this video.