Inflation Reduction Act Impacts: Major Changes To 45L Tax Credit & 179D Deduction
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.
Changes to 45L
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:
- Beginning in 2023, new homes certified under the Energy Star programs will be eligible for a $2,500 tax credit.
- The credit is increased to $5,000 for dwelling units certified under the Zero Energy Ready Homes Program (ZER).
- For multifamily units, the base qualification decreases to $500, while ZER multifamily units are $1,000 each.
- Multifamily units meeting prevailing wage requirements will receive an increased $2,500 credit for base qualification and $5,000 for ZER.
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.
Changes To The 179D Deduction
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 prevailing wage requirement ensures that any laborers and mechanics employed by the taxpayer or any contractor and subcontractor in the installation of any property shall be paid wages at rates not less than the prevailing rates for construction, alteration or repair of a similar character in the locality in which such property is located as most recently determined by the Secretary of Labor.
- The new apprenticeship requirement is based on the new Section 45(b)(8), which requires that a certain percentage of labor hours be performed by a qualified apprentice in a registered apprenticeship program.
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%.
- The energy reduction for projects that meet the prevailing wage requirements will change from 50% reduction to 25% compared to the most recent ASHRAE Standard 90.1 and yield a 179D deduction of $2.50/SF. For every 1% of additional reduction above 25%, it will provide an additional $0.10/SF of deduction up to $5.00/SF. Projects that do not meet the prevailing wage requirement will change from 50% reduction to 25% compared to the most recent ASHRAE Standard 90.1 and yield a 179D deduction of $0.50/SF. For every 1% of additional reduction above 25%, it will provide an additional $0.02/SF of deduction up to $1.00/SF.
- The deduction is now allocable to architects, engineers and designers responsible for designing a building’s energy-efficient systems.
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.