Shedding light on types of federal funds and energy upgrades

Project eligibility and tax incentives

Both businesses and tax-exempt organizations can now benefit from Section 179D, Energy Efficient Commercial Buildings Tax Deduction¹ for energy efficient projects. In addition to using Section 179D deductions, companies can use tax credits for upgrades or construction projects. Specifically, Section 148, Investment Tax Credit (ITC) allows building owners to use the tax credit against their own tax liability. In most cases, the credits now carry back three years and forward 20 years. If the owner(s) does not have tax liability or taxable income, then certain credits may be sold to another taxpayer. This concept is known as transferability.

The IRA established a new elective retrofit program as an alternative deduction for energy-efficient building retrofits, which is taken in the qualifying final certification year. The alternative deduction requires a qualified retrofit plan and is focused on energy use intensity rather than total annual energy and power costs. The alternative deduction cannot exceed the aggregate adjusted basis of retrofit property placed in service.

Most of the IRA tax credits are available through 2032,² but it is important to note that both current and future construction projects may be credit eligible. The date construction begins and the date the property is ultimately placed in service are both critical in determining whether the project is eligible for enhanced credit opportunities. It is necessary to carefully review the type of credit being claimed and the requirements specific to that credit.

If clients are considering renovations or new construction projects, both qualify for the 179D deduction. Additions such as a school’s new library or a hospital’s new wing qualify based on the efficiency of only the addition, not the efficiency of the entire/existing structure. The IRA changes to 179D removed the partial deduction related to the separate systems, so the deduction is always based on the efficiency of the project as a whole.

Buildings that increase their energy efficiency by at least 25 percent will be able to claim this deduction, with bonuses for higher efficiency improvements. The higher level of incentive for large savings is designed to encourage projects that are “zero energy ready.” In addition, owners can earn 179D benefits every three to four years, if a new capital event has led to additional reductions in the building’s carbon footprint.

Qualifying lighting upgrades

Improving a building’s energy efficiency creates long-term savings that go straight to the bottom line; however, the upgrades can sometimes be costly. Now, with the passage of the IRA, commercial real estate property owners and designers have additional incentives available when making energy-efficient improvements. While there are inherent savings to upgrading interior lighting from legacy metal halide fixtures to new, energy-efficient LEDs—more than 60 percent in energy consumption, reduced maintenance costs, and overall lower heat in the facility—the rebates and incentives from the IRA and Section 179D tax code offer even more reasons to move forward with these projects.³