Commercial Building Owners May Take Advantage of Inflation Reduction Act Provisions
As one of the most significant contributors to global carbon emissions, buildings are critical to the conversation when it comes to carbon-footprint reduction. Buildings contribute to 37% of global energy-related CO2 emissions [i]. Many building owners and operators need insight into how their buildings are using energy and ways to help finance improvements. An unprecedented opportunity related to potential financial support became available in 2022. The Inflation Reduction Act (IRA), the most significant piece of climate legislation in U.S. history, provides significant support for clean-energy investments, initially estimated to total $369 billion. The IRA expands existing tax incentives to help reduce greenhouse gas emissions in the United States by an estimated 40% from 2005 levels by 2030 [ii]. For commercial building owners, the incentives may help move their facilities closer toward their sustainability goals while creating greater energy efficiencies. Commercial-building owners may be able to take advantage of tax incentives to help meet their carbon-reduction goals and accomplish energy savings in the long term.
What building owners need to know about the Inflation Reduction Act
Key IRA provisions and tax incentives that may benefit commercial buildings include:
Expanded energy efficient commercial buildings incentive under section 179D of the tax code to allow for a tax deduction of up to $5.00 per square foot on a sliding scale for building energy efficient projects, up from $1.80 per square foot under prior law. Projects must meet strict specified wage and apprenticeship requirements to qualify for the maximum deduction amount.*
Reduced qualification requirements for commercial - building owners to benefit from energy efficiency deductions, with buildings required to demonstrate only a 25% energy savings rather than 50% under prior law.
Expanded and extended section 48 investment tax credit (ITC) for certain renewable energy property. The ITC provides credits to projects beginning construction before 2025, transitioning to a modified version of the credit for projects beginning construction in the subsequent decade. The maximum 30% credit for renewable energy property placed in service after 2021 includes: qualified fuel-cell property; solar property to produce electricity, heat or light; geothermal property to produce electricity; waste energy recovery property; standalone energy storage; microgrid controllers; combined heat and power property; and geothermal property to heat or cool a structure.*
For buildings located in rural and low-income areas, section 30C has created incentives around alternative fuel vehicle refueling and charging property. Each alternative refueling and recharging solution may be eligible to receive a base credit of 6% and up to $100,000. Businesses that meet strict specified prevailing wage and registered apprenticeship criteria may qualify for a 30% credit with the same $100,000 limit.
How you can take advantage of new IRA provisions
Under one of the requirements to qualify for the new increased deduction of up to $5.00 per square foot under section 179D, building owners must use the current ASHRAE 90.1-2007 baseline to measure energy savings. Building owners retrofitting their facilities to create greater energy efficiencies can use certified building performance metrics to show their energy savings.
Commercial-building owners may also be eligible for the energy efficiency deduction with improvements to their facility's heating, cooling, ventilation, hot water, interior lighting or building envelope.
The path forward for commercial buildings
Lessening the energy consumption of commercial buildings is critical to the goal of a more sustainable future. The enactment of the IRA clean-energy incentives may potentially help more buildings reduce their energy use.
The Treasury Department and IRS are expected to continue publishing guidelines to provide additional details and compliance instructions for the new provisions, including how facility owners should measure their energy-use intensity.
*In order to qualify for the maximum amount of the section 179D deduction or section 48 ITC, along with some other IRA provisions, facilities owners must meet strict prevailing-wage and apprenticeship requirements. Please contact your tax advisor to determine the requirements and project eligibility under the IRA.
[i] World Economic Forum, "Why building greener is crucial to meeting Paris climate targets", Patrick Henry, November 1, 2021. [Accessed Dec. 5, 2022].
[ii] The White House, “New OMB Analysis: The Inflation Reduction Act Will Significantly Cut the Social Costs of Climate Change” Candace Vahlsing, August 2022 [Accessed May 17, 2023].