The Money Tree: Planning for 2023 and Beyond

Today, Part 1 of 2: Summary of Inflation Reduction Act incentives/tax deductions for energy efficient commercial buildings
December Issue, Part 2 of 2: Who and what is eligible? Who gets the money? How? What are the rules? Drivers, opportunities and barriers for CxPs and clients.

By Diana Bjornskov

As noted in our BCxA Checklist article last January, certain temporary tax deductions were made permanent in the U.S. Consolidated Appropriations Act, 2021. The IRS reinstated the “Energy Efficient Commercial Buildings Deduction,” a dollars-per-square-foot tax deduction for commercial building owners who place qualifying energy-efficient systems in service. It also included a new section which allows the deduction to be adjusted annually for inflation. The article cites details of new or existing buildings’ installation of interior lighting; building envelope; HVAC; and/or hot water systems.

But wait, there’s more! … and now, it’s also performance-based (think NCCx, EBCx and OCx)

The Inflation Reduction Act now supersedes certain areas of the CAA, providing additional federal tax incentives to commercial building owners and building-related businesses. The “permanent” tax deduction (Section 13303):

·       is no longer permanent, the deduction is reduced from a lifetime cap to a 3-year cap;

·       will no longer be adjusted for inflation;

·       updates eligibility (efficiency) requirements based on energy cost reduction of at least 25% compared to a “reference building”;

·       requires deductible improvements to be “certified” by a licensed design professional;

·       increases the deduction with a credit of $0.50/square foot and increased by $0.02 for each percentage point by which the certified efficiency improvements reduce energy and power costs, with a maximum amount of $1.00 per square foot;

·       provides for labor-related deductions by meeting prevailing wage and registered apprenticeship requirements. The base amount is $2.50, which would be increased by $0.10 for each percentage point increase in energy efficiency, with a maximum amount of $5.00 per square foot.

Taxpayers making energy-efficiency retrofits that are part of a qualified retrofit plan on a building that is at least five years old would be able to deduct their adjusted basis in the retrofit property (not to exceed per-square foot value determined on the basis of energy usage intensity). To qualify, retrofit plans must be expected to reduce a building’s energy use intensity by at least 25%.

The maximum deduction amount would be the total deduction a building can claim less deductions claimed with respect to the building in the preceding three years.

Any tax-exempt “Owner” (entity) would be allowed to allocate the deduction to the designer of the building or retrofit plan.

What does that mean? Look for these answers in your December Checklist:
Who and what is eligible? Who gets the money? How? What are the rules? Learn the drivers, opportunities and barriers for commissioning providers, builders, manufacturers and clients.