Inflation Reduction Act: Construction and Real Estate Update
Published August 17, 2022
The Inflation Reduction Act of 2022 was officially signed into law by President Biden on August 16, 2022. While much commentary has revolved around revenue raise provisions such as expanded IRS funding and 15% minimum tax on corporations with book income over $1 billion, the bill has the potential to have wide ranging impact for those in the real estate and construction industry. The bill has significantly expanded two key Federal energy efficient tax incentives currently in existence, the 179D Deduction and 45L Tax Credits.
The 179D Deduction
The 179D Deduction is currently permanent within the law, allowing government owned building owners to allocate special tax deductions to their architects, engineers, contractors responsible for designing the building’s energy efficient systems. This deduction had a current maximin of $1.88 per square foot in 2022. The bill includes significant changes in three main areas:
- Starting in 2023, increase the maximum deduction to $5 per square foot if prevailing wage and apprenticeship requirements are met.
- Significantly expands the eligibility of the building to include other tax-exempt entities such as nonprofits, religious, educational entities, etc. potentially expanding the tax savings opportunities for those in the design and construction industry, that before may not have been involved in public owned property.
- Updates the calculation methodology eliminating the partial deduction capability into a more favorable sliding scale, which may result in more benefit when the maximum deduction is not obtained
- This deduction is available to architect, engineering firms and contractors when their considered “primary designers”.
- Beginning, 2023, the square foot deduction is reduced to a 50 cents to $1.00/sq ft, if certain additional criteria is not met – including prevailing wage during construction.
45L Tax Credits
The existing 45L tax credit program allowed up to a $2,000 tax credit per eligible dwelling unit, typically impacting single family and multi-family developments. The 45L program had expired at the end of 2021, but the bill includes the significant changes in these areas:
- Extends the 45L tax credit retroactive to the beginning of 2022 through the end of 2032.
- Increases the maximum tax credit to $5,000 per dwelling unit starting in 2023 (Still $2,000 for 2022).
- Aligns some criteria on the program with other Government Energy programs, which can expand eligibility of residential developments, which before were limited to multifamily projects 4 stories of less
This tax credit is abatable to home builders and multifamily residential developers. For multifamily developers, the tax credit is reduced to $500 or $1,000 per unit if strict energy efficient rules are not followed.
The expansion of the 179D Deduction and 45L Tax Credits, further signals that opportunities in the real estate and construction industry from the Inflation Reduction Act, will directly evolve around the energy and climate provisions of the legislation, to further promote, expand and incentivize actions around the design, development and construction of energy efficient property.
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