Thanks to Abby Massey of Calvetti Ferguson (Tax Incentive Director from Houston, TX) for this recap from a recent CICPAC webinar.
The Inflation Reduction Act was passed in 2022 and introduced several energy efficient tax incentives. For most taxpayers and CPAs these incentives can seem complicated at first glance. So how do these incentives work and what is the best way for a taxpayer to ensure they can claim them? Below we will dive into two popular incentives, requirements for maximizing the value, and practical tips for identifying eligible projects.
The Investment Tax Credit (ITC)
The Investment Tax Credit is available to those who install qualified energy property, such as solar panels or geothermal heat pumps. The credit is a percentage of the qualified energy property basis, or 6% at the base rate. If the project meets prevailing wage & apprenticeship requirements or generates less than 1 MW of electricity, the credit increases to a bonus rate of 30%. Additional value (base = 2%/bonus = 10%) can be added on for meeting domestic content, energy community, or low-income community requirements. If a project meets all requirements, a maximum credit of 70% can be achieved.
The Inflation Reduction Act also introduced new rules that allow government and tax-exempt entities to benefit from this tax incentive. These entities can claim the credit through the direct pay method, which would allow them to receive a check from the Treasury in the amount of the credit. In addition, these credits can be transferred or sold to eligible buyers.
Energy Efficient Commercial Buildings Deduction (Section 179D)
The Energy Efficient Commercial Buildings Deduction is a tax deduction available to those who install HVAC and hot water, interior lighting, or building envelope systems into new or existing commercial buildings. The Section 179D program is eligible for a base rate of $0.50 – $1.00 per square foot. If prevailing wage and apprenticeship requirements are met on the project, the deduction increases to $2.50 – $5.00 per square foot. The deduction amount is determined through an energy modeling analysis, which compares the building to a baseline standard as outlined in ASHRAE 90.1-2007. An alternative method was introduced by the IRA, which determines a deduction based on a before-and-after look of a building that underwent an energy-efficient retrofit.
Section 179D is available to taxpayers who newly construct or renovate their existing properties. Architects, engineers, and contractors can also claim this deduction for work performed on government or tax-exempt buildings.
Prevailing Wage & Apprenticeship Requirements
Prevailing wage & apprenticeship requirements impact many of the incentives included in the Inflation Reduction Act. Complying with these requirements means significantly larger incentives. To comply, all laborers and mechanics employed by the taxpayer, or their contractors, must be paid prevailing wages in the location of the project. For the ITC, this includes alteration or repair projects that occur 5 years after the initial project.
In addition, all eligible projects must participate in registered apprenticeship programs. A percentage of the total labor hours should be worked by qualified apprentices. The total apprentice labor hours in 2023 should equal 12.5% or more of the total hours. This percentage increases to 15% in 2024.
It’s important to identify potential projects early to maximize the benefit from these incentives. Taxpayers and their CPAs should be discussing future plans to implement new construction or energy efficient projects. Cost segregation studies or clean energy loans, such as C-PACE, are good indicators that other incentives may be available to claim. Involve a trusted tax incentive specialist early who can further identify eligible projects and educate the team on the requirements. In the case of Section 179D other licensed individuals, such as a Professional Engineer, are required to certify the tax deduction. Having an experienced team of professionals will ensure a smooth and compliant tax incentive process.
About the Author
Abby Massey, Tax Incentives Director, Calvetti Ferguson
Abby has more than 13 years of professional expertise, with six years dedicated to tax incentive consulting and seven years in engineering and commercial building design. She earned her Bachelor of Science in Civil Engineering from Purdue University and has experience collaborating with clients in various industries, including construction, building design, manufacturing, and energy. Abby specializes in energy-efficient commercial building tax incentives, Section 179D tax deductions, research and development tax credits, and cost segregation studies.