2022-2023 Tax Planning Guide
VIEWpoint Issue 1 | 2022
Brief Insights | Meeting Provider Relief Fund Reporting Requireme...
The recently passed Inflation Reduction Act (IRA) significantly alters the 45L credit and 179D deduction amounts and qualification criteria. Here’s a rundown on some of the major changes.
In 2005, Congress passed the original 45L tax credit legislation. The 45L credit is a tax incentive available to home builders and multifamily developers. The credit allows “eligible contractors” to claim a $2,000 tax credit for each newly constructed or substantially reconstructed energy-efficient home in the year that a dwelling unit is sold or leased as a residence.
In the IRA, the 45L tax credit is extended through 2032, with changes to qualifying standards beginning in 2023 when the credit transitions to the Energy Star criteria. Key credit details include:
Initially, low-rise residential developments were the only ones eligible for this credit, but residential developments will be credit eligible beginning in 2023. The base qualification requirements for single-family, manufactured and multifamily dwellings is that they must meet both national and local requirements. There will also be prevailing wage requirements for additional multifamily credit benefits, ensuring laborers are paid competitive rates. Additionally, Low Income Housing Tax Credit (LIHTC) projects will not be required to reduce basis by the amount of 45L tax credit taken.
The 179D deduction was made permanent in the Consolidated Appropriations Act in 2021, and the IRA significantly changes the deduction amounts and qualification criteria. The IRA extended the deduction of up to $1.88/SF to Dec. 31, 2022, and it will increase beginning on Jan. 1, 2023. Below is an overview of key changes made to the 179D deduction:
The new deduction amount is increased from $1.88/SF to $5.00/SF if it meets the two new requirements:
The apprenticeship and prevailing wage requirements for the increased deduction amount create a massive incentive for claimants who meet them. If not met, the maximum deduction would drop from $1.80/SF to $1.00/SF (adjusted for inflation), while the deduction would grow to almost 3 times the existing rate at $5.00/SF if met. This is calculated by the applicable dollar value times the square footage, subject to the cost-of-living adjustment. Then, the applicable dollar value is equal to $0.50, increased by $0.02 (but not above $1.00) for each percentage point by which the total annual energy and power costs for the building are certified to be reduced by a percentage greater than 25%.
Moving forward, there will be record-keeping requirements to establish that claimants meet these conditions, and the Internal Revenue Service (IRS) will impose penalties on those who fail to meet the requirements but still claim the increased deduction. Doeren Mayhew’s dedicated construction CPAs are preparing for these changes and advising our clients and prospects accordingly.
Are you curious about 45L or 179D and want to learn how this legislation could impact you? Contact us today to learn more.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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