Your questions, answered: the multifamily housing guide to the Inflation Reduction Act

On February 8, 2023, Baker Tilly hosted a webinar dissecting the provisions of the Inflation Reduction Act (IRA) and their impact on the multifamily housing industry. The IRA is the largest energy incentive effort in U.S. history with more than 70 credits included in the act. This webinar covered provisions in the IRA including Section 48 (solar), 45L energy efficiency credits and electric vehicle charging stations. Watch the recording of the webinar here. During the webinar, attendees asked questions for further clarification on the IRA and its impacts. Directly from the webinar, here are your burning questions, answered by our presenters.

1. Is basis reduction not applicable to Low Income Housing Tax Credit (LIHTC) deals?

For certain credits (i.e., 48 and 45L), any required basis reduction shall not apply for purposes of determining eligible basis under section 42.

2. If I am underwriting a LIHTC project, would I reduce my depreciable basis by 50% of the solar costs, but I would not reduce my LIHTC basis?

Correct. The solar credit basis reduction does not apply for purposes of determining eligible basis under section 42.

3. I don't understand how New Market Tax Credits (MNTC) work in supportive housing projects, but I am curious if there is a multiplicative benefit (credit) available on those types of projects?

Projects can use NMTC for housing projects that are not utilizing LIHTCs and are located in an eligible NMTCs census tract and meet certain NMTC program requirements. The solar credit can be paired with both residential and commercial projects.

4. Do I need prevailing wage and apprenticeship?

Yes, if a project must satisfy the prevailing wage and apprenticeship requirements to get the five times bonus, the project must satisfy both the prevailing wage and apprenticeship requirements. However, if a solar project is under 1 MW, then prevailing wage and apprenticeship do not apply.

5. Is prevailing wage higher than market rate wages and if so, by how much?

One of the factors for determining prevailing wage is geographic location. The difference between prevailing wage and market rate wage varies based on geographic location. In some locations, it is anticipated that the prevailing wage will not be higher than the market rate wage.

6. Can a not-for-profit entity pass the credit to the general contractor?

This might be possible with the credit for electric charging stations. However, this credit and others are eligible for elective payment by not-for-profit entities. Which means the not-for-profit entity can obtain a tax refund for the amount of the credit from the IRS. Presumably, not-for-profit entities would take advantage of the elective payment option.

7. Has the IRS provided any guidance on how direct pay might work for not-for-profit entities?

We have not yet seen any guidance on this issue as of this writing.

8. Are you precluded from any benefits if you are also operating as an Opportunity Zone project?

No. In addition, to claim the credit for an electric charging station, the property must be in a specified area and it likely is in a qualifying area if the property is in an Opportunity Zone.

9. On environmental justice solar and wind capacity, is this credit subject to the passive activity rules?

This is an open issue currently. However, without further guidance from the government the credits are presumably subject to the passive activity rules.

10. When you say "geothermal heat pump systems," are you actually referring to "ground source heat pumps?”

To clarify, yes, but both qualify for the credit.

11. Can you explain the ratio again, number of megawatts over what?

The numerator is the environmental justice solar and wind capacity limitation allocated to the taxpayer by the government and the denominator is the total megawatt name place capacity of the facility applying for the credit.

12. When will the Baker Tilly IRA energy community maps be available?

The Energy Community Mapping Tool is now available on our website. This interactive tool can help determine if a project’s location may qualify for the energy community bonus component of the Investment Tax Credit and Production Tax Credit under the IRA. You can view the tool here.

13. On the low-income bump up, what do you need to do to get the 20% bump?

The project must be part of a qualified low-income residential building project or a qualified low-income economic benefit project. Also, you must receive an allocation from the federal government. Information on the application process is not available as of this writing.

14. If you meet all the qualifications, you could technically get a 70% credit for Section 48?

Correct, the maximum possible credit percentage for Section 48 credits is 70%.

15. Does cost of the certification count towards credit?

No, it does not.

16. I was understanding that Section 45L was extended to major rehab, is that correct?

Yes, the construction requirement in Section 45L includes substantial reconstruction and rehabilitation.

17. Is Section 45L prevailing wage and apprenticeship or just prevailing wage?

The increased credit amount under Section 45L only requires the prevailing wage to be satisfied.

18. Are there any considerations/issues/benefits to having both Section 48 and Section 45L credits on Section 42 housing?

The Section 48 Investment Tax Credit and Section 45L credits are separate and a project can qualify for both. There are considerations for each separate credit, but generally there are no issues created by claiming both credits.

19. Do we have a timing estimate on when we will know if the three-story rule will be enforced?

Unfortunately, we are waiting on further guidance from the IRS, and we do not know when that guidance will come out.

Baker Tilly is here to help

The Inflation Reduction Act provides massive opportunities once you understand the basics of the IRA provisions. Do you have more unanswered questions? Our multifamily housing 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.