The Inflation Reduction Act (IRA) is a massive bill that contains a significant amount of critical information. Even for real estate professionals who are generally well-versed in tax credits, the bill can be confusing in parts and overwhelming in others when figuring out the impact of the Inflation Reduction Act on real estate.
Baker Tilly hosted a webinar in which we outlined four key IRA provisions that real estate companies need to understand.
One of the provisions (Section 179D) is a deduction, meaning that it reduces taxable income. The other three provisions (Section 148, Section 30C and Section 45L) are credits, which means they are an actual dollar-for-dollar reduction in the amount of tax due.
Credits deliver value to projects in three notable ways:
The owner(s) can use the tax credit against their own tax liability. In most cases, the credits now carry back three years and forward 20 years.
If the owner(s) doesn't have tax liability or taxable income, then they can sell certain credits to another taxpayer. This concept is known as transferability.
For certain credits, tax-exempt owners can receive a “direct payment” in the form of a cash payment from the IRS. Basically, they can be treated as if they made a payment to the IRS, and then they can file a tax return and receive a refund.
The sum of these parts is that the IRA is essentially enabling all entities to utilize this legislation, regardless of tax status.
Looking forward, let’s now examine the four provisions that real estate companies need to know about, starting with Section 179D.
Section 179D: energy efficient commercial building property (EECBP)
Section 179D is a deduction against taxable income for EECBP placed in service during the tax year. EECBP is a specific type of property that falls under three main categories:
Interior lighting systems
Heating, cooling, ventilation and hot water systems
The total deduction is subject to limits based on the size of the buildings, the extent of the energy efficiency obtained and the year placed in service.
To be eligible, taxpayers will need to install EECBP as part of a plan designed to reduce the total annual energy and power costs with respect to the EECBP by 25% or more in comparison to a reference building, which meets the minimum requirements of Reference Standard 90.1 using specified methods. This rule applies to tax years beginning after Dec. 31, 2022. Previously, a 50% reduction was required. The current maximum deduction – a cap on the amount that can be deducted – is 50 cents per square foot, plus two cents per square foot for each additional percentage point reduction in total energy and power costs between 25% and 50%.
The provision allows for a deduction against taxable income equal to the cost of EECBP.
There also is a possible increase in the maximum amount of a deduction, which applies if the wage and apprenticeship requirements are satisfied. Instead of the maximum deduction being 50 cents to a dollar per square foot, the max is increased to $2.50 per square foot plus an additional 10 cents per square foot for each additional percentage point reduction in total energy and power costs from 25% to 50%.
Certain tax-exempt entities that install EECBP on property owned by those tax-exempt entities can allocate the deduction to the person primarily responsible for designing the EECBP instead of the tax-exempt entity.
The maximum deduction amount allowed to taxpayers claiming the section 179D deduction is reduced by the aggregate section 179D deductions taken by the taxpayer in the three tax years preceding the year of current deduction. For tax-exempt entities allocating the deduction to the person primarily responsible for designing the EECBP, the maximum deduction amount is reduced by the aggregate section 179D deductions taken by the taxpayer in the four tax years preceding the year of the current deduction.
Section 48: investment tax credit (ITC) for energy property
Previously, the ITC had not been available for projects that began construction after Dec. 31, 2021, and it had been reduced to 26% of the eligible basis. Now it applies to projects that begin construction before Dec. 31, 2024, and has a base credit of 6%.
In more specific terms, the base percentage is 6% for specified properties (including solar property and fiber-optic solar) and 2% for all other properties.
There is a 5X bonus that enables the 6% credit to increase to 30% if you meet the prevailing wage and apprenticeship requirements. It also offers up to 10% bonuses for both domestic content and energy community as long as the property is placed into service after 2022.
Additionally, Section 48 offers a potential bonus for low-income communities or Tribal lands. This increase in credit percentage can be up to 10% for a qualified solar or wind facility located in a low-income community or on Indian land. A qualified solar or wind facility that is part of a qualified low-income residential building project or a qualified low-income benefit project can receive an increase in credit percentage of up to 20%. The amount of this credit is based on an allocation from the government. Based on the allocation received from the government, the credit can be up to 10% or 20%.
The Section 48 credit is eligible for transferability or direct payment by eligible taxpayers.
Section 30C: alternative fuel vehicle refueling property credit
While Section 30C credit includes many different types of property, the focus from a real estate standpoint is on charging stations.
Under the prior law, the base credit was 30% of the eligible basis. Just like in the other examples here, the new law features 6% of the eligible basis with a 5X bonus if you meet the prevailing wage and apprenticeship requirements or construction of the project begins before Jan. 29, 2023.
With Section 30C, the location of the property is essential, as it only applies to property placed in a nonurban area. An exception is made, however, for urban areas that are eligible for new market tax credits.
We should note, additionally, that this credit only applies to property placed in service after the end of 2022 and before the end of 2032. This credit is eligible for transferability and direct payment by eligible taxpayers.
Section 45L: new energy efficient home credit
The 45L credit applies if energy-efficient homes are manufactured, constructed and sold to an unrelated third party. Leasing also can qualify as selling the property.
Under the old law, the credit was $2,000 per home. Now, there are two tiers – a $2,500 credit and a $5,000 credit for single-family or manufactured homes (depending on how energy-efficient the home is). And for multifamily homes, the tiers are $500 and $1,000.
Once again, there is a 5X bonus, although in this case, the apprenticeship requirement isn’t a factor. So if a project meets the prevailing wage requirement, the multifamily credit tiers are increased to $2,500 or $5,000.
On the downside, 45L is not a transferrable credit and is not eligible for direct payment. And once again, it applies only to homes sold before the end of 2032.
Baker Tilly is here to help
Once you understand the basics of the IRA provisions (and perhaps if you work with Baker Tilly to understand the complexities), your company is left staring at a massive opportunity. Our real estate professionals are here to assist, whether it’s a couple of phone calls or a deep dive into your specific situation. To begin the conversation, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
