By Kevin Sullivan, PE, HERS Rater, Partner, BRAYN Consulting
Just as the summer was winding down, the massive legislative package known as The Inflation Reduction Act of 2022 (“IRA”), or H.R. 5376, was signed into law by President Biden. The law includes some significant tax saving opportunities for builders and developers. This article will focus on the energy efficient tax policy aspects of the IRA, specifically the implications for the 45L New Energy Efficient Home Credit (“45L”) and the 179D Energy Efficient Commercial Building Deduction (“179D”).
45L Tax Credit
Congress passed the original 45L Tax Credit legislation in 2005 and has extended it multiple times since enactment. 45L has historically provided a $2,000 tax credit per home or apartment unit and goes to the builder or developer having basis in the property during construction.
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The good news is that the IRA extended 45L in its current form for 2022, so builders and developers have a straightforward path to take advantage of the credit for their projects this year.
PRACTICE TIP: 45L is a federal tax credit, so taxpayers that haven’t claimed them should be able to claim them for homes and apartments built as far back as 2019.
The qualification requirements for the tax credits change for homes sold or leased starting in 2023, but the amount of the credit increases. See below for the current and future state of the tax incentive.
| Homes Sold or Leased | 45L Tax Credit | Qualification |
| All Open Tax Years Thru 2022 | $2,000/home | 50% better than 2006 IECC Buildings 3 Stories or Lower |
| 2023 – 2032 | $2,500/home* | Energy Star Certification |
| 2023 – 2032 | $5,000/home* | Zero Energy Ready Home Certification |
* Multifamily developments must meet prevailing wage requirements starting in 2023, or credit is reduced to $500/$1,000 per unit.
For homes or units that sell or lease starting in 2023, Energy Star certification will be the minimum qualification criteria. The Zero Energy Ready Home (ZERH) program builds on the Energy Star requirements and certification would double the tax credit.
Below is a breakdown of the criteria for all qualified dwelling types.
Single-Family Homes Qualification
Must meet BOTH National and Local Requirements
| Homes Sold or Leased | National Energy Star Program | Local Energy Star Program |
| 2023 – 2024 | Energy Star V3.1 | Energy Star Single-Family New Homes Program Requirements applicable to the location of such dwelling unit (as in effect on the latter of January 1, 2023, or January 1 of two calendar years prior to the date the dwelling unit was sold/leased) |
| 2025 – 2032 | Energy Star V3.2 | Same as above |
Manufactured Homes Qualification
Only National Requirements
| Homes Sold or Leased | National Energy Star Program |
| 2023 – 2032 | Energy Star Manufactured Home National program requirements as in effect on the latter of January 1, 2023 or January 1 of two calendar years prior to the date such dwelling unit is sold/leased |
Multifamily Qualification
Must meet BOTH National and Local Requirements
| Homes Sold or Leased | National Energy Star Program | Local Energy Star Program |
| 2023 – 2032 | Multifamily New Construction National Program Requirements (as in effect on either January 1, 2023 or January 1 of three calendar years prior to the date the dwelling was sold/leased, whichever is later) | Energy Star Multifamily New Construction Regional Program Requirements applicable to the location of such dwelling unit (as in effect on either January 1, 2023 or January 1 of three calendar years prior to the date the dwelling was sold/leased, whichever is later) |
Only multifamily homes are required to meet prevailing wage requirements, ensuring that any laborers and mechanics employed by contractors and subcontractors are paid not less than the prevailing rates for similar construction, alteration, and repair in the locality. It is expected that the Treasury Department will issue regulations related to prevailing wage requirements given how little guidance exists.
Energy Star & Zero Energy Ready Homes
Builders and developers should get an assessment of their current projects against the Energy Star and ZERH requirements to understand if there are any design and construction changes that would need to be made to comply. The components of both programs include the following:
Complete Thermal Enclosure System
- High-quality insulation & fenestration
- Proper installation & air sealing
- Reduced thermal bridging
Complete Heating & Cooling System
- Fully-engineered design
- Best practice installation
- Fresh air & exhaust
Complete Water Management System
- Water-managed site, foundation, walls, roof
Additional ZERH Requirements
- Solar Ready
- Indoor air quality measures
LIHTC & Mixed-Use Buildings
Low Income Housing
Starting in 2023, Section 42 Low Income Housing Tax Credit (LIHTC) projects are no longer required to take the 45L tax credit into account when computing the adjusted basis of buildings subject to LIHTC credits. So, claiming 45L Tax Credits no longer reduces LIHTCs.
PRACTICE TIP: LIHTC developers can now raise additional equity capital with 45L Tax Credits since they can now take full advantage of BOTH tax incentives for the first time.
Buildings Over 3 Stories & Mixed-Use Developments
Starting in 2023, homes and apartments over 3 stories can qualify for the 45L Tax Credit. Since the qualification criteria changes to Energy Star, there is no longer a restriction on the number of stories, and mixed-use buildings with more than 50% residential square footage can also qualify.
Energy Codes & Program Adoption
The IRA included $1B in grants to encourage state and local governments to adopt more stringent energy code regulations, including $670M for the adoption of energy regulations that meet the zero energy provisions in the 2021 edition of the International Energy Conservation Code (IECC).
Builders and developers are finding that they are building homes and residential buildings very close to the Energy Star and ZERH program requirements. With the acceleration of energy code requirements, and the significant tax savings with 45L Tax Credits, some will find it worth adopting these programs.
179D Deduction
Congress passed the original 179D legislation in 2005 and recently made the deduction permanent via the Consolidated Appropriations Act, 2021. 179D currently provides a deduction of up to $1.88/SF in 2022 for owners of privately-owned energy efficient commercial properties (accelerated depreciation), as well as designers of government-owned properties (windfall “other deduction”).
The IRA significantly changes the 179D deduction amounts and qualification criteria. The biggest change is that the deduction amount will now be based on two prongs: 1) the amount of energy savings compared to the ASHRAE 90.1 Standard and 2) certain prevailing wage and apprenticeship requirements. Here is a quick rundown on some of the major changes highlighting existing law vs new law based on placed in service (“PIS”) date:
| 179D Provision | Existing Law PIS Date Before 1/1/2023 | IRA Changes PIS Date Starting After 12/31/2022 |
| Maximum amount of deduction | $1.80 times square footage, subject to cost-of-living adjustment | Up to either $1.00/SF or $5.00/SF. The applicable dollar value times the square footage, subject to cost-of-living adjustment. The applicable dollar value is equal to $0.50, increased (but not above $1.00) by $0.02 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 percent. These amounts are increased from $0.50 to $2.50 and from $0.02 to $0.10 for any energy efficient commercial building property, energy efficient building retrofit property, or property installed pursuant to a qualified retrofit plan if certain apprenticeship and prevailing wage requirements are met. |
| Energy efficient commercial building | Property certified as having reduced the energy and power costs of the building by 50 percent or more in comparison to a reference building | Property certified as having reduced the energy and power costs of the building by 25 percent or more in comparison to a reference building |
| Reference building standard | The most recent ASHRAE Standard 90.1 affirmed by the Secretary not later than the date 2 years before construction begins | The most recent ASHRAE Standard 90.1 affirmed by the Secretary not later than the date 4 years before such property is placed in service |
| Partial allowance | $0.60 per qualified system | Eliminated |
| Entities that can allocate the deduction | Federal, State, or local government or a political subdivision thereof | Federal, State, or local government or a political subdivision thereof PLUS Indian tribal governments, Alaska Native Corporations, and any organization exempt from the tax imposed under this chapter |
| Interim lighting rules | Reduction in lighting power density of 25 percent (50 percent in the case of a warehouse) of the minimum requirements | Eliminated |
| Alternative deduction for qualified retrofit property | N/A | A written plan prepared by a qualified professional expected to reduce energy use by 25 percent or more with a maximum deduction amount similar to the standard 179D deduction. More details on this to follow. |
| Inflation adjustment | Cost of living adjustment under 1(f)(3) determined by substituting “calendar year 2019” for calendar year 2016 in subparagraph (A)(ii) | Cost of living adjustment under 1(f)(3) determined by substituting “calendar year 2021” for calendar year 2016 in subparagraph (A)(ii) |
The apprenticeship and prevailing wage requirements for the increased deduction amount would create a massive incentive for claimants to 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.
Starting in 2023, residential buildings over 3 stories can qualify for both 45L Tax Credits of up to $5,000 per home or unit, and 179D Tax Deductions of up to $5.00 per square foot.
New Opportunities
The IRA provides significant changes to both 45L Tax Credits and 179D Tax Deductions, two energy efficient programs that businesses have taken advantage of for years. For the first time, these incentives are available for the next several years and can be planned for. Builders and developers should take advantage of the new opportunities that these changes provide.
About the Author
Kevin Sullivan is a partner and the director of engineering at BRAYN Consulting LLC, an Energy Star Partner serving builders and developers across the country.