The Inflation Reduction Act's key impacts on energy credits as it pertains to multifamily housing

The Inflation Reduction Act (IRA) was signed into law on Aug. 16, 2022 and has many benefits like the 45L tax credit for multifamily housing. Some of the provisions from the IRA relevant for the multifamily housing industry are outlined in this article.

Section 48 investment tax credit

Section 48 allows a credit equal to a percentage, energy percentage, of the basis of energy property placed in service during the tax year. Energy property includes solar panels. There is a base energy percentage of 6% for certain qualifying properties, which includes solar panels. This base energy percentage is increased to 30% if a project satisfies one of three requirements; (1) the project has a maximum net output of less than one megawatt of electrical energy, (2) the project begins construction before the date that is 60 days after the Secretary publishes guidance with regards to the prevailing wage and apprenticeship requirements, or (3) the project satisfies the prevailing wage or apprenticeship requirements.

The Secretary has published guidance regarding the prevailing wage and apprenticeship requirements. The date that is 60 days after the publication date is January 29, 2023. The prevailing wage requirement requires a taxpayer to ensure that any laborers and mechanics employed by the taxpayer, any contractor, or any subcontractor in the construction of an energy project are paid wages at rates not less than the prevailing rates for construction of a similar character in the locality in which such project is located. A taxpayer must also ensure laborers and mechanics are paid prevailing wages for any alteration or repair work on such project during a five-year period beginning on the date the project is placed in service.

The apprenticeship requirement requires a taxpayer to ensure that, with respect to the construction, alteration, or repair of any energy project, that not less than the applicable percentage of the total labor hours are performed by qualified apprentices. The applicable percentage for energy projects that begin construction during 2023 is 12.5%. For energy projects that begin construction after 2023 the applicable percentage is 15%.

Domestic content bonus credit amount

The energy percentage for any energy project satisfying the domestic content requirement is increased. To satisfy the domestic content requirement a taxpayer must certify to the Secretary that any steel, iron, or manufactured product which is a component of such energy project was produced in the United States. For an energy project that is eligible for the base 6% energy percentage, the domestic content bonus credit amount is an additional 2%. For an energy project that is eligible for the base 30% energy percentage, the domestic content bonus credit amount is an additional 10%. The domestic content bonus credit amount is only available for an energy project placed in service after December 31, 2022.

Increase in credit rate for energy communities

The energy percentage for any energy project placed in service in an energy community is increased. For any energy project in an energy community and eligible for the base 6% energy percentage, the energy percentage increase is an additional 2%. For any energy project in an energy community and eligible for the base 30% energy percentage, the energy percentage increase is an additional 10%. The definition of an energy community includes; (1) a brownfield site, (2) a metropolitan statistical area or non-metropolitan statistical area which has 0.17% or greater direct employment or 25% or greater local tax revenues related to the extraction, processing, transport or storage of coal, oil or natural gas, and (3) a census tract in which after December 31, 1999, a coal mine has closed, or after December 31, 2009, a coal-fired electric generating unit has been retired, or which is directly adjoining a census tract satisfying either of these descriptions. The increase in credit rate for energy communities is only available for an energy project placed in service after December 31, 2022.

Solar facilities placed in service in connection with low-income communities

For a qualified solar facility for which the Secretary of the Treasury allocates environmental justice solar and wind capacity limitation, the energy percentage for an energy project shall be increased by up to 10% or up to 20%. One requirement for a qualified solar facility is that it must have a maximum net output of fewer than five megawatts.

A qualified solar facility located in a low-income community or on Indian land is eligible for up to an additional 10% credit amount. A low-income community is defined as any population census tract, which is not located within a metropolitan area, where the poverty rate for such tract is at least 20%. In addition, any population census tract located within a metropolitan area where the median family income for such tract does not exceed 80% of the greater statewide median family income or the metropolitan area median family income. Indian land is defined as including Indian reservations; public domain Indian allotments; former Indian reservations in Oklahoma; land held by incorporated Native groups, regional corporations and village corporations under the provisions of the Alaska Native Claims Settlement Act; and dependent Indian communities within the border of the United States whether within the original or subsequently acquired territory thereof, and whether within or without the limits of a State.

A qualified solar facility part of a qualified low-income residential building project or a qualified low-income benefit project is eligible for up to an additional 20% credit amount. A qualified low-income residential building project is a facility installed on a residential rental building that participates in a covered housing program, a housing assistance program administered by the Department of Agriculture under title V of the Housing Act of 1949, a housing program administered by a tribally designated housing entity or such other affordable housing programs as the Secretary may provide. Additionally, to be eligible as a qualified low-income residential building project, the financial benefits of the electricity produced by this facility must be allocated equitably among the occupants of the dwelling units of such buildings. A qualified low-income economic benefit project is a project where at least 50% of the financial benefits of the electricity produced by the facility are provided to households with an income of less than 200% of the poverty line or less than 80% of the area's median gross income.

By approximately February 12, 2023, the Secretary shall establish a program to allocate amounts of environmental justice solar and wind capacity limitation to qualified solar and wind facilities. The annual capacity limitation of environmental justice solar and wind allocations is 1.8 gigawatts of direct current capacity. Any amount not allocated will carry forward to the next year. The final year for allocations will be the later of the calendar year in which the Secretary determines that the annual greenhouse gas emissions from the production of electricity in the United States are equal to or less than 25% of the annual greenhouse gas emissions from the production of electricity in the United States for the calendar year 2022, or 2032.

The percentage, equal to the environmental justice solar and wind capacity limitation allocated to a facility divided by the total megawatt nameplate capacity of such facility, is multiplied by either the 10% or 20% amount the facility qualified for to determine the actual increase in credit percentage for the facility.

Basis

The basis of energy property is reduced by 50% of the eligible credit allowed. This basis reduction does not apply for purposes of determining eligible basis under section 42 for low-income housing. Any basis of property attributable to qualified rehabilitation expenditures is not an eligible basis for the investment tax credit.

Section 30C alternative fuel vehicle refueling property credit

There is a base credit of 6% multiplied by the cost of any depreciable qualified alternative fuel vehicle refueling property placed in service by a taxpayer during the taxable year. The amount of credit is limited to $100,000 per item of property placed in service. The 6% credit amount is increased to 30% for a project that either; (1) begins construction prior to the date that is 60 days after the Secretary publishes guidance concerning the prevailing wage and apprenticeship requirement or (2) satisfies the prevailing wage and apprenticeship requirements.

The definition of qualified alternative fuel vehicle refueling property includes any property (not including a building and its structural components) that is depreciable, the original use begins with the taxpayer, and is used for the recharging of motor vehicles propelled by electricity, but only if the property is located at the point where the motor vehicles are recharged (i.e., electric charging stations).

Property is not eligible for the alternative fuel vehicle refueling property credit unless it is placed in service in an eligible census tract. An eligible census tract is defined as either of two areas, first, any population census tract, which is not located within a metropolitan area, where the poverty rate for such tract is at least 20%, or any population census tract located within a metropolitan area where the median family income for such tract does not exceed 80% of the greater of statewide median family income or the metropolitan area median family income. Second, any area that is not an urban area. An urban area is defined as a census tract that, according to the most recent decennial census, has been designated as an urban area by the Secretary of Commerce.

Section 45L new energy efficient home credit

The new energy efficient home credit for the taxable year is the applicable amount multiplied by each qualified new energy efficient home that is constructed by an eligible contractor and acquired by a person from such eligible contractor for use as a residence during the taxable year. For multifamily buildings, a dwelling unit must be part of a building eligible to participate in the Energy Star Multifamily New Construction Program.

A multi-family home meeting the most recent Energy Star Multifamily New Construction National Program requirements and also meeting the most recent Energy Star Multifamily new Construction Regional Program Requirements applicable to the location of a dwelling unit is eligible for a $500 credit. A multifamily home meeting the requirements to be certified as a zero energy-ready home under the zero energy-ready home program of the Department of Energy as in effect on January 1, 2023, is eligible for a $1,000 credit. For a multifamily home that satisfies the prevailing wage requirements the $500 credit is increased to $2,500 and the $1,000 credit is increased to $5,000.

In order to claim this credit, a taxpayer must receive a certification that the home has satisfied the relevant energy savings requirements. The Secretary can issue guidance as to the requirements of the certification. Any certification must be in writing and specify in a readily verifiable fashion the energy efficient building envelope components and energy efficient heating or cooling equipment installed and their respective rated energy efficiency performance.

Guidance has been issued under section 45L prior to the IRA being signed into law. Until future guidance is issued it is assumed that this guidance will apply to section 45L as enacted in the IRA. The following are terms defined in this guidance. For purposes of section 45L, an eligible contractor includes a person that hires a third party contractor to construct a qualified energy efficient home and then sells the home to the homeowner. A dwelling unit eligible for the credit must be three stories or less above grade in height. A qualified energy efficient home is acquired from an eligible contractor for use as a residence if the person that constructed the home sells or leases the home to another person for use as a residence.

Transferrable credits

Under the IRA an eligible taxpayer may elect to transfer all (or any portion) of an eligible credit. This provision applies to tax years beginning after December 31, 2022. The sale of the eligible credits must be to an unrelated taxpayer and must be for cash. The cash payment to the transferor will not be includible in the gross income of the transferor. A transferor must make an election to transfer a portion or all of an eligible credit no later than the due date (including extensions) for the return of tax for the taxable year for which the credit is determined.

In the case of any eligible credit determined concerning any facility or property held directly by a partnership or S corporation, the partnership or S corporation must elect to transfer any eligible credits. Any amount received by the partnership or S corporation is treated as tax-exempt income. A partner’s distributive share of such tax-exempt income shall be based on such partner’s distributive share of the otherwise eligible credit.

An eligible taxpayer is any taxpayer that is not eligible for the direct pay provisions of section 6417. Section 6418 contains a list of eligible credits. Regarding the credits mentioned in this article, section 48 investment tax credit and section 30C alternative fuel vehicle refueling property credit are eligible credits that may be sold. The section 45L new energy efficient home credit is not an eligible credit and may not be sold.

Where do you begin?

The IRA and its associated benefits are a bit of a Rubik’s Cube that requires time, effort and professional guidance to maximize its full benefits.

Baker Tilly assists clients with tax credit strategies in addition to planning, sizing and designing solar, microgrid and storage for real estate properties (residential and commercial). We consider factors such as price, geography, local and regional power prices and utility rules, and all state and federal regulations.

For more information on this topic or to learn how Baker Tilly specialists can help, 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.