Qualifying commercial and rental property owners who are interested in renewable energy projects—take note! You may qualify for significant tax credits or deductions through the new Inflation Reduction Act. Although the rules and details are quite complex, the benefits may be very worthwhile. Be sure to call our office for all of the qualifying information and details, but in the meantime, check out the opportunities below to see if any could be a fit for you.
Business Energy Investment Tax Credit
The Business Energy Investment Tax Credit (ITC) is primarily for solar panel installations on commercial buildings and residential rentals. It is also applicable for wind power installations or projects involving fuel cells, microturbines, geothermal, and other technologies. As always, there are many complexities to qualify. For example, the project must have been placed into service after 2021, however construction must begin prior to 2025. Once your installation is in service, you may depreciate it.
To realize the full tax credit, you must continue to own the property for five years after the installation. There are special considerations for larger energy projects which comply with new prevailing wage and apprenticeship requirements. The ITC reduces the energy property’s basis by half the credit amount, increasing your depreciation deductions. Here’s more good news—the 80 percent first-year bonus depreciation is available for improvements placed in service during 2023; the depreciation drops down to 60 percent for 2024.
Business owners can also “stack” tax credits by adding on any of the following “extra credit” features:
- Satisfaction of domestic material content requirements
- Located in or servicing low-income communities and/or low-income housing programs
- Located in a qualifying energy community, such as a brownfield site or area where employment in fossil fuels or coal is significant
Keep It or Sell It
The ITC is transferable to a person or entity not related to you. The buyer must pay in cash and you won’t be taxed on the payment—think of it as tax-free income! The credit must be transferred by the due date of the tax return for the taxable year in which the credit is determined, and a credit may be transferred only once.
A New ITC Act is Coming in 2024
The ITC in its current form expires in 2024. It will be replaced with a new, technology-neutral
clean electricity ITC. Under the new credit, any project producing electricity will qualify for a 30 percent clean energy ITC if its greenhouse gas emissions are zero. The clean energy ITC will phase out by 2032, or when the electric power sector emits 75 percent less carbon than 2022 levels (whichever is later).
Energy-Efficient Commercial Buildings Deduction
Since 2006, owners who make their commercial buildings more energy-efficient have been able to claim an immediate deduction for a portion of that cost. Beginning in 2023, the Inflation Reduction Act significantly increases the amount of this deduction, but remember, this is an accelerated tax deduction, not a tax credit. Using Section 179 expensing, building owners may deduct many expenses without complying with the complexities of Section 179D deductions– however, there is an annual limit of $1,080,000 (for 2022).
Commercial and Multi-Family Owners Should Use Section 179D
The Section 179D deduction is only for commercial buildings and multi-family residential
buildings of four stories or more. It is not available for rentals of single-family homes, multifamily buildings of three stories or less, mobile homes, or manufactured homes. You’ll qualify for a deduction when you upgrade interior lighting, HVAC or hot water systems, or the building “envelope,” i.e., floors, roofs, or walls with energy efficient technologies.
Energy efficiency must improve by a minimum of 25 percent, however the maximum deduction amount increases for every percentage point of energy efficiency above the 25 percent benchmark.
This year’s deduction cap is $5 per building square foot, but to claim it, building owners must also comply with prevailing wage and apprenticeship requirements. If those requirements are not met, a building owner may only claim a $1-per-square-foot maximum deduction.
Inspections are Required!
Your building must be inspected by a “qualified individual” who can certify that you’ve completed all of the requirements to the IRS. This could mean you will need to hire various specialists and/or licensed engineers in HVAC, refrigeration, illumination, etc., so be aware of that beforehand.
Designers Can Claim the Deduction, Too
The Inflation Reduction Act extends the 179D deduction to designers of buildings for any tax-exempt entity, however the entity must allocate the deduction to its designer, which are defined as architects, engineers, design-build contractors, and performance contractors.
Electric Vehicle Charger Credit
The Inflation Reduction Act extends the tax credit for installing an electric vehicle charging station in a commercial building, rental building, or parking lot through 2032. Again, prevailing wage and apprenticeship guidelines prevail for the maximized credit, which is only available for properties in low income or rural areas. The annual cap on this credit is $100,000 per unit.
Here’s the Summary
The Inflation Reduction Act has expanded the ITC program to businesses for installing renewable energy facilities in commercial and rental buildings, including bonus credits which will add up to 40 percent or more in ITC. These bonus credit opportunities include projects which are:
- in compliance with domestic content requirements,
- located in low-income communities,
- participating in federal housing programs, or
- located in communities involved with fossil fuels
The Energy Efficient Commercial Buildings Deduction can be used for projects that
increase a building’s energy efficiency by 25 percent (formerly 50 percent). The
cap on the deduction is increased to $5 per square foot if prevailing wage and
apprenticeship requirements are met, but it drops down to $1 per square foot if not.
The credit for installing electric vehicle charger units in commercial or rental buildings is
extended to 2032. The following rules apply:
- The 30 percent credit applies to projects complying with prevailing wage and
- apprenticeship rules; otherwise, it is 6 percent.
- The credit is available only for properties located in low-income or rural areas.
- The annual cap on the credit is increased to $100,000 per charging unit.
We hope these tips help as you consider renewable-energy improvements for your properties. As always, if you have any questions, or would like to discuss, please call Russo Accounting at (212) 279-9800 or send us an email.