When it comes to making homes and buildings more energy efficient, tax credits and deductions can provide helpful financial incentives. Two major options are the 179D tax deduction for commercial buildings and the 45L tax credit for residential properties. But how do these two programs compare? Let's take a closer look.
The Core Idea
The 179D deduction aims to motivate commercial building owners to pursue efficiency upgrades that reduce energy usage. The amount deducted is based on square footage and how much efficiency is improved over baseline standards.
Meanwhile, the 45L credit provides a dollar-for-dollar tax credit up to $5,000 for making new or existing homes more efficient. The exact credit amount depends on the energy standards each home meets.
Commercial vs. Residential
The 179D and 45L incentives target different property types. 179D is for commercial buildings including offices, hospitals and residential complexes that are four stories plus. This encompasses a wide span of commercial real estate to drive efficiency improvements across the entire sector.
Meanwhile, 45L focuses squarely on the residential market, including single-family homes, townhouses and apartments. Its broad eligibility fosters energy savings in the residential sphere among homeowners, developers and builders alike.
Meeting the Efficiency Benchmarks
To qualify for the 179D commercial deduction, buildings must comply with efficiency standards established by ASHRAE, a leading building engineering association. Specifically, ASHRAE sets comprehensive guidelines for constructing and renovating commercial structures to minimize energy use while maintaining occupant comfort.
Understanding the Financial Benefits
Deductions vs. Credits
The 179D commercial deduction lowers taxable income. But the 45L residential credit directly subtracts dollars from taxes owed, making its savings more immediate and often larger.
Maximizing the Value
The potential savings from both programs are substantial. With the passage of the Inflation Reduction Act, 179D deductions range from $0.50 to $5.00 per square foot, varying based on the efficiency gains over baseline and whether prevailing wage and apprenticeship standards are met. Minimum energy cost savings must be 25%, maximum 50%.
For 45L, credits span from $500 to $5,000 per dwelling unit. The exact value depends on property type, which efficiency certification is obtained and whether multifamily developers pay prevailing local wages.
Recent Legislative Developments
The Inflation Reduction Act of 2022 updated both the 179D and 45L incentives in important ways. It imposed stricter certification standards but also increased deduction and credit amounts. Critically, it linked these tax benefits to labor practices through new prevailing wage standards.
Adhering to prevailing wage standards can now substantially boost incentives. Owners and designers meeting requirements can qualify for a 5x deduction multiplier on 179D deductions, making projects much more lucrative. For 45L multifamily projects, paying prevailing wages unlocks higher per-unit credit tiers of up to $5,000 per unit.
Claiming the Tax Incentives
Overview of the Process
Claiming these incentives requires careful adherence to all qualifications and documentation requirements. For both 179D and 45L, the first step is an energy analysis by a certified assessor to verify efficiency levels meet the standards.
For 179D, the process involves energy modeling to quantify savings, followed by detailed certification paperwork supporting the deduction amount. 45L requires upfront ENERGY STAR or ZERH certification before the tax credit application.
Obtaining Proper Certification
For 179D, the IRS requires certification by a qualified professional like an engineer or contractor to validate the energy savings. This substantiates the deduction. 45L likewise relies on analysis and certification from an independent third-party rater. This ensures accuracy and credibility for the tax credit claim.
Navigating Energy Efficiency Incentives
In summary, the 179D and 45L tax programs take complementary approaches to driving energy efficiency through financial incentives. While their details differ, both offer substantial savings for making commercial and residential buildings greener.
Whether you’re looking to leverage 179D for your commercial building or 45L for your residential rental property, Engineered Tax Services is here to help. Our extensive experience with energy tax incentives enables us to maximize your claims and ensure IRS compliance. Reach out today for a no-obligation energy evaluation.