The Inflation Reduction Act (the “Act”) was signed into law by President Biden on August 16, 2022, marking a pivotal point for the legislation that has been more than a year in the making. This $740 billion Act raises revenue through various provisions but also includes expansions to existing and expired energy efficiency tax incentives, providing benefits particularly to the real estate industry.
Accelerated Cost Recovery for Green Building Property
Code section 179D, which permits an accelerated cost recovery deduction for energy efficient commercial building (EECB) property for the year placed in service, was made permanent as part of the Consolidated Appropriations Act of 2021. However, this provision was increased and enhanced as part of the Inflation Reduction Act.
Prior to the Act, 179D provided a 2022 deduction of up to $1.88 per square foot for the installation of systems that reduce total energy and power costs by 50 percent in comparison to a building meeting minimum requirements set by specific standards. Thanks to the Act, the current maximum of $1.88 per square foot has increased to $5 per square foot. Not only does new construction benefit from the Act, but energy-efficient retrofits to existing buildings will also qualify.
Additional 179D benefits are awarded to tax-exempt building owners. Under the pre-Act version of 179D, only government building owners could allocate these tax deductions to designers. The Act grants tax-exempt building owners the ability to allocate 179D tax deductions to architects, engineers, and designers responsible for designing a building’s energy efficient systems.
Extension, Increase, and Modification of New Energy Efficient Home Credit
Before the enactment of the Inflation Reduction Act, a New Energy Efficient Home Credit (NEEHC) was available to eligible contractors for qualified new energy efficient homes acquired by a homeowner before Jan. 1, 2022. A home had to satisfy specified energy saving requirements to qualify, which could result in a credit of either $1,000 or $2,000, depending on which energy efficiency requirements the home satisfied.
The Act makes the credit available for qualified new energy efficient homes acquired before January 1, 2033. The amount of the credit has been increased, and can be up to $5,000, depending on which energy efficiency requirements the home satisfies and whether the construction of the home meets prevailing wage requirements.
The provisions of the Act generally apply to dwelling units acquired after December 31, 2022. However, the Act’s extension of the credit applies to dwelling units acquired after December 31, 2021.
A major focus of the Inflation Reduction Act is to combat climate change by significantly expanding energy efficiency tax incentives while also increasing the number of taxpayers that meet the eligibility requirements of these incentives. Please contact your Kreischer Miller relationship professional to discuss this new legislation further and understand how it impacts your business.
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