Demystifying IRA Tax Incentives for Building Owners: Your Questions Answered
Federal tax law expert Gabrielle Jacques of Norton Rose Fulbright and energy efficiency expert Rich Maiolo of Capital Review Group spoke with LABBC’s David Hodgins to answer common owner questions.
Watch the full recorded webinar here: Decarb is Going On Sale
By: LA Better Buildings Challenge
The Inflation Reduction Act of 2022 (IRA) is the most significant climate legislation in U.S. history. But what does this mean to building owners? As one White House expert recently put it, “decarbonization is going on sale.”
Two-thirds of IRA funding will take the form of tax credits, which are being enhanced to benefit more organizations, including nonprofits and even local governments. In addition, the EPAct 179D tax deduction has been made permanent, and its value has more than doubled from $1.80 per square foot to $5.
LABBC’s David Hodgins spoke with federal tax law expert Gabrielle Jacques of Norton Rose Fulbright and energy efficiency expert Rich Maiolo of Capital Review Group on Wednesday, July 19, 2023, about:
Recent changes to federal tax incentives under IRA;
How to access these incentives; and
Case studies on real-world projects
The webinar served as a jumping off point for LABBC’s development of more resources to help simplify the process of accessing IRA incentives and project financing. Though the panel was able to get to some audience questions before time was out, several went unanswered. Our guest experts answered many of them for you below.
Do new development projects with PV require occupancy to claim the section 45L new energy efficient home credit? Are there any other restrictions?
Gabrielle Jacques: Eligible contractors can claim a section 45L tax credit for qualifying energy efficient dwelling units acquired “for use as a residence.” Section 45L of the tax code does not define “for use as a residence” and does not explicitly require the property to be the person’s principal residence.
There are certification requirements to verify energy efficiency. The contractor must pay laborers and mechanics prevailing wages in order to claim the maximum credit amount. To claim the 45L tax credit, an eligible contractor needs to fill out IRS Form 8908.
If I am a buyer of ITC, what do I need to have in hand before paying for the credit? (i.e. Is there a DoE form I need to have approved or that the seller needs to have approved) … and what do I need to attach to my tax return to apply my credit?
GJ: To purchase ITCs from an unrelated seller, you need to:
Obtain from the seller the registration number for the property generating the credit (Seller must pre-register electronically with the IRS – the IRS said more information on the pre-filing registration process will be available by late 2023); and
Fill out a “transfer election statement” and attach it to your tax return for the year you are claiming the credit.
Consider additional contractual safeguards (e.g., indemnity, tax insurance) as the buyer is liable for recapture during the 5-year period after the project is placed in service for tax purposes.
Is there information available on the application process for the ITC 20% energy equity bonus?
GJ: The IRS has said it will start accepting applications for 2023 allocation from small wind and solar projects that qualify for the 20% bonus (termed “category 3” and “category 4” projects) in the third quarter this year.
For further information on the 48(e) bonus credits, see LMI Bonus Credits, The Two Low-Income Community Bonus Tax Credit Programs, and LMI Bonus Credit Guidance.
If property is owned by a limited partnership with a 1% nonprofit general partner and a 99% for-profit limited partner, can the 179 ITC be wholly allocated to the nonprofit GP? If so, can the credits be exchanged for direct reimbursement?
GJ: No. Partnerships are not “applicable entities” eligible to make a direct pay election, even if all of the partners are applicable entities. Further, applicable entities that are partners in a partnership holding the qualifying ITC property cannot make a direct pay election with respect to such property.
Alternatively, an applicable entity could hold undivided interests in qualifying property under a JV that elects out of subchapter K or tenancy-in-common ownership structure and claim direct pay with respect to its undivided ownership or tenancy-in-common interest.
Can you confirm that existing buildings greater than five years old can use either the standard deduction methodology or the alternative deduction for retrofit methodology?
Rich Maiolo: Projects started prior to January 2023 would use the standard deduction. Projects started after January of 2023 would use the alternative methodology for the deduction.
How would you recommend public agencies approach energy efficiency projects in order to benefit from 179D considering they’re tax exempt, yet still paying for projects?
RM: There are some options, including:
IRA grants for installing energy efficient systems,
Local, state, and federal incentives, and
Local utilities incentives.
With respect to the 179D requirements, are there any exceptions to the 4-story minimum height standard for a newly constructed multifamily property?
RM: No, commercial multifamily if the building is strictly multifamily and less than four stories above ground level. However, if the building is multiuse (retail on the first floor and commercial multifamily on three floors or any combination of multifamily and commercial) it may qualify for 179D deductions.
For the deduction reset, can folks apply 2021 and then apply for 2023 because the new law is implemented? Or does the applicant need to wait until 2024 if they applied for the deduction in 2021 under the old law?
RM: The new regulations limit recertification to three years for commercial projects and four years for not-for-profit and public projects. A commercial project certified in 2021 could not be recertified until 2024.
Watch the full recorded webinar here: Decarb is Going on Sale