Energy-Efficient Tax Incentives

Energy Study for EPAct 179D

A result of the Energy Policy Act of 2005, the 179D program incentivizes taxpayers to increase the energy efficiency of their new construction or renovation projects. The program focuses on three key areas of construction—interior lighting systems, building envelope, and HVAC – and is in effect for work completed after December 31, 2005.  The 179D program was made permanent by the Consolidated Appropriations Act of 2021, but program standards and parameters were changed by the Inflation Reduction Act of 2022. 

For Projects Placed-in-Service Between 1/1/2006-12/31/2022:  

The incentive is based on the analysis of the installed systems as compared to benchmarks designated in the ASHRAE standards. The goal is to achieve a minimum 50% energy savings versus these benchmarks.  For buildings placed-in-service between 1/1/2016-12/31/2020, the designated reference standard is the ASHRAE 90.1 2007 standard.  For buildings placed-in-service after 1/1/2021, the reference standard is the most recent ASHRAE standard published 2 years before the start of construction of said building.

Depending on the actual level of savings attained, a project can achieve a federal tax benefit of a $0.60 to $1.80 deduction per square foot. For projects placed in service after 12/31/20, these amounts are adjusted for inflation annually.

For Projects Placed-in-Service After 12/31/2022: 

The ASHRAE standards are still in play, but the goal has changed — taxpayers must now demonstrate a 25% reduction in total annual energy and power costs relative to benchmark.  For buildings placed-in-service after 12/31/2022, the reference standard to be used is the most recent ASHRAE standard published in the 4 years before the property was placed-in-service. 

The scope of savings still varies with project size, and a project can achieve a maximum federal tax benefit of $5.00 per square foot.  The deduction is now determined using an “Applicable Dollar Value” (ADV) multiplication factor.  The initial value and eventual cap of the ADV varies depending on whether prevailing wage and apprenticeship requirements are satisfied. 

As mentioned above, 25% is the new minimum energy reduction threshold that must be met to qualify for the deduction.  The ADV will reward taxpayers who exceed this minimum threshold up to a certain cap.

Under the legacy program or the New Law, the analysis must be done in compliance with the methodologies outlined in the program, and depending on the scope of work to be evaluated, may include a full building simulation model. As with most tax programs, the benefit is related to the unique facts and circumstances of each individual project. The personal attention each client receives in the “Consult” phase of The Capstan Course will ensure that our team fully understands your unique situation.

Energy Study for 45L Tax Credit

The 45L Tax Credit is a one-time federal tax credit that promotes the construction of energy efficient residential dwellings. The credit is available to builders, developers and others who build homes for sale or lease, and credit is allocated per “dwelling unit.” The IRA retroactively extended the 45L Tax Credit for properties placed-in-service through 2022. 

For Projects Placed-in-Service Between 1/1/2006-12/31/2022

The credit per dwelling unit and the existing qualification criteria will remain unchanged.  45L-eligibility is restricted to for-sale residential homes and residential rental property with a maximum of 3 stories, providing a $2000/unit tax credit for qualifying unit/s. Each unit must be assessed individually to verify the required reduction in energy consumption. 

The IRA also extends the 45L Tax Credit moving forward for projects placed-in-service from 1/1/2023-12/31/2032.   For projects placed-in-service in 2023 and beyond, several major changes will go into effect:  

  • The energy efficiency requirements for the 45L tax credit will change from 50% better than the 2006 IECC energy code to Energy Star and Zero Energy Ready (ZER) home standards.   
  • The maximum tax credit will increase to up to $5,000/dwelling unit 
      • The maximum tax credit for single-family Energy Star homes will be $2,500 
      • The maximum tax credit for single-family ZER homes will be $5,000. 
      • For the Energy Star Multifamily program (5 units or more) the credit will be $2,500 per unit, subject to prevailing wage provisions*. If these provisions are not followed, the credit is reduced to $500 per unit.
      • For the Zero Energy Ready Multifamily Program (5 units or more) the credit will be $5,000 per unit, subject to prevailing wage provisions*. If these provisions are not followed, the credit is reduced to $1,000 per unit.
  • Section 42 Low Income Housing Tax Credit (LIHTC) projects will NOT need to take the 45L credit into account when determining adjusted basis of a property for LIHTC Credits.

    Clients are encouraged to consult Capstan regarding eligibility of past projects and planning considerations for future projects.

     

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