Both of these Energy Efficiency Benefits are complicated tax issues, so this is a 100,000-foot view to give you a general understanding (in 60 seconds or less).
Who Do Energy Efficiency Benefits Apply To?
The property needs to be energy efficient, as defined by Congress and the IRS. Of course, each code section has a different definition. (Logic was not applied here😊)
Sec. 179D is a federal tax deduction available to both owners of commercial property, and apartment buildings that are taller than four stories.
Sec. 45L is a federal tax credit available to owners of apartments if the building is not taller than three stories (for property first leased in 2022 or earlier) or any height, starting in 2023.
Also, in certain circumstances, the designer of the Sec. 179D Energy Efficiency for a government, or not for profit owned building, can also qualify for the deduction. This issue will be covered in a future e-mail blast from us.
The Rules For 2022
For Sec. 179D, the deduction can range from $.31 to $1.88 a square foot, depending on the level of energy efficiency. For most taxpayers, the building needs to be at least 30,000 square feet before the tax savings are significant enough to pursue the Energy Certification.
For Sec. 45L, the tax credit is $2,000 per qualified unit. This credit is available the first time a unit is Leased (not placed in service, like the above Sec. 179D deduction).
Starting in 2023
For Sec. 179D, the deduction now ranges from $.50 to $5.00 a square foot. While the testing standard has not changed from 2022, to attain the high end of the deduction, the building must be both energy efficient, and have passed the Prevailing Wage & Apprenticeship (PWA) Requirement
There is a very interesting opportunity here. For those properties where the construction began by January 29, 2023, they may be able to benefit from the higher deduction, without meeting the PWA tests! We have clients who will benefit from this window of opportunity.
For Sec. 45L, the credit ranges from $500 to $5,000, depending on the energy efficiency and if the property passes the Prevailing Wage Requirement. The energy efficiency standard for 2023 is higher than prior years.
Taxpayers are still waiting on additional guidance for these two energy efficient opportunities, including what the IRS will be requiring as proof for meeting the PWA Requirements.
If you need further guidance on this topic, we are here to help. Please reach out to Jason Hussar
or Roger Upton with any questions.