The recently passed Inflation Reduction Act (IRA) creates several new opportunities for commercial, government, and nonprofit building owners to benefit, spanning incentives for energy-efficiency projects, solar arrays, battery storage, EV Charging Stations, and multiple related tax credits and deductions. While some clarification is still needed, here’s our take on what building owners should take away from the IRA:
Nonprofits & Public Sector Can Now Recieve Investment Tax Credits (ITC) for Solar and Energy Storage
Since Investment Tax Credits (ITC) - Section 48 - have historically only been offered to tax-paying organizations, tax-exempt organizations have had to miss out on the much-needed incentives or structure complex 3rd-party investor arrangements. Now, nonprofits can assign or directly receive the value of the tax credit amount, acting almost as a rebate for projects (e.g. 30-50% for solar; more below).
The National Council of Nonprofits singles out (A Nonprofit Perspective on the Inflation Reduction Act) how “…the Act provides tax benefits to tax-exempt organizations by enabling some nonprofits and governments to transfer the tax break to contractors and reduce the cost for installing energy-efficient systems.”
The Center for American Progress reviews how cities and states can receive tax benefits to improve energy efficiency through the IRA (How States and Cities Can Benefit From Climate Investments in the Inflation Reduction Act). “...the Inflation Reduction Act modifies the federal clean energy tax credit program to directly pay public and nonprofit entities, including those owned and managed by states and municipal governments. This will allow these entities to take advantage of tax treatment previously only available to investor-owned utilities….”
179D Energy Efficient Commercial Building Tax Deduction Expanded
The existing version of 179D Commercial Buildings Energy-Efficiency Tax Deduction provides a deduction of up to $1.88 per square foot for commercial building owners who construct new or renovate existing energy-efficient buildings as well as those who provide government-owned buildings with technical specifications and designs (architects, engineers, contractors, energy efficiency contractors) up through 12/31/2022. While some direction is still needed from the Secretary of the Treasury to clarify details, we understand the new IRA-adjusted 179D includes the following revisions for implementations 1/1/2023 onward:
Lowers from 50% to 25% the minimum energy savings for eligibility (so, a lower target for incentives)
Removes rules for partial certifications for each lighting, HVAC, and building envelope.(currently allocated at $.60/sf)
Removes the lifetime limit, meaning deductions can now be taken every three or four years, depending on circumstances.
Deduction of $2.50 per square foot, with an incremental $.10 increase for each additional percentage of reduction up to a potential maximum of $5.00 per square foot. NOTE that this level of deduction comes with new thresholds to meet prevailing wage and apprenticeship requirements, in addition to the now 25% energy reduction threshold. Much lower deduction levels ($.50-$1.00/sf) are still available if the prevailing wage and apprenticeship requirements are not met.
Include tax-exempt entities. While government-owned buildings could assign to design partners since a 2008 change, the 2023 179D allows charitable organizations, religious institutions, private schools or colleges, tribal governments, and any other organization falling under IRC 501(c) to directly use funds or assign the ITC.
Creates a new alternative deduction energy-efficiency retrofit program, requiring a qualified retrofit plan with the goal to reduce EUI ( energy use intensity) vs. reducing annual energy costs.
Solar & Energy Storage Incentives Bolstered
Solar investment tax credits are raised back to 30% for 10 years, now with potential for up to 50% with additional 10% bonus credits for deployments meeting requirements:
+10% for Located in an “Energy Community” which includes brownfield sites or those communities meeting certain factors related to coal/ oil/ natural gas.
+10% for Domestic Content, with thresholds for U.S.-produced steel and components.
The above must also meet the requirements for the Act Beginning Construction Deadline and the prevailing wage and apprenticeship requirements.
And, as noted above, public and nonprofit organizations can now leverage these ITCs.
PV Magazine provides a thorough overview (What’s in the Inflation Reduction Act for the solar industry?) of how to take advantage of investment tax credits (ITC) for solar. They state:
“The ITC has been increased from 26% to 30%, and may now be transferred or sold to other taxpayers. The 30% applies to both business and residential projects, including projects installed in 2022, and will last until the end of 2032.”
Energy storage (e.g. batteries) projects were previously ineligible for tax credits unless they were connected directly to solar power projects. The Inflation Reduction Act removes these requirements and allows energy storage projects to receive the same 30% tax credit, even if they are stand-alone facilities. Batteries connected to a solar power project will continue to qualify for the credit, even if they are no longer being charged by solar power.
Interconnection costs will also be included in the tax credit, for projects smaller than 5 MWac.
EV Charging Stations Incentives Revived & Revisited
Several EV incentives are in place encouraging U.S production of EVs and components, as well as consumer and commercial fleet EV purchases, all driving up demand for EV Charging Stations infrastructure.
The Section 30C Investment Tax Credit is back from its 12/31/2021 expiration yet with some new factors. This is known as the “Alternative Fuel Vehicle (AFV) Refueling Property Credit” for EV Charging Stations, also known as EVSE (Electric Vehicle Supply Equipment). Instead of the 30% ITC that was available in the previous program, the new IRA-driven version for 2023 provides up to 30% tax credit with a set of requirements similar to those found in the solar ITC:
Starts with a base credit of 6%, with adder credits for multiple factors
Meets prevailing wage and apprenticeship requirements
Located in an eligible census tract (such as a qualifying low-income community or non-urban area)
Meets domestic content targets
Capable of bidirectional charging
The ITC leverage for tax-exempt organizations has a twist compared to solar/storage: they can approve the EV Charging Station seller to use the tax credit.
Carbon Capture Credits Extended
The tax credit for carbon sequestration - Section 45Q - is extended for implementations up to January 1, 2033 and the minimum carbon capture requirement is reduced. Plus, an enhanced credit is available for certain direct air capture facilities.
While the Inflation Reduction Act is just rolling forward and leaves several finer points to be defined, the good news is that more building owners will be able to leverage greater incentives for investments that will help to minimize energy consumption, costs, and carbon and help the move toward a Net Zero future.