Because Earth Day is Friday, April 22 this year, our concern for the environment is pretty much uppermost in our minds. We here at Engineered Tax Services have two energy efficient solutions that can help us reach a greener, more sustainable future: 45L tax credits and 179D tax deductions.
What Are 45L Tax Credits?
If you’re a qualified contractor—that is, the developer, builder, or homeowner of a building—you can obtain, via the Section 45L tax credit, a tax credit of $2,000 per dwelling unit if you put in place improvements that yield energy consumption levels significantly less than certain national energy standards. For example, if you own a home but hire a contractor to handle building or upgrading your home, you are the person who can benefit from this tax. But to qualify for the 45L tax credit, the home must be sold, leased, or rented.
You can claim the credit retroactively, but only claim for properties built or remodeled in the past three years. You can carry the unused credit forward up to 20 years.
What kinds of properties are eligible for this tax credit?
Both single-family and multi-family dwellings that are three stories or less above grade; they must have a higher energy efficiency level than the 2006 IECC standards. Other dwellings are eligible for the 45L tax credit, such as apartment buildings, townhouses, student housing, condominiums, and assisted living facilities. The housing must be designed for occupancy with one or more rooms, including a kitchen, a living room, and a chamber for sleeping.
Can remodeling projects qualify?
Yes. Since Section 45L defines “new construction” as including any “substantial rehabilitation,” renovation or upgrading projects qualify, in addition to brand-new construction.
Specifically, what kind of energy standards are necessary to be eligible?
For single-family homes and multi-family dwelling units, the unit must consume a minimum of 50% less energy to offer the same heating and cooling functions as any identical non-energy efficient residence. The building envelope itself must account for one-fifth of this improvement; it must deliver a 10% reduction in energy use for heating and cooling, the same as any identical non-energy efficient dwelling.
What Is the 179D Tax Deduction?
By claiming a Section 179D deduction, you can receive as much as $1.80 per square foot in tax deductions if you make eﬃciency improvements above certain energy thresholds to commercial buildings. The $1.80 per square foot deduction also now increases slightly each year to keep up with inflation.
On December 28, 2020, Section 179D was made a permanent part of the U.S. tax code in the Consolidated Appropriations Act of 2021. Now architecture, engineering, and construction companies can claim the deduction going forward, so they can plan for and generate significant tax savings from future construction projects.
How does 179D work?
IRC Sec. 179D lets building owners and eligible designers/builders claim a tax deduction of up to $1.80 per square foot for installing qualifying energy efficient systems and buildings. Tenants may be eligible if they pay for construction. The tax deduction applies to both new construction and retrofits. Qualified buildings include:
- Commercial buildings, including warehouses and parking garages;
- Multifamily properties with four stories or more; and
- Government-owned buildings, such as public universities and libraries.
To qualify, the improvements must reduce the energy and power costs of a building located in the United States by 50% or more, compared to the minimum requirements of ASHRAE Standard 90.1. If the 50% target saving isn’t met, you can get a partial deduction of $0.60 per square foot for each of the following components:
- Interior lighting systems meeting a 25% saving;
- Heating, cooling, ventilation, and hot water systems meeting a 15% saving; and
- Building envelope meeting a 10% saving.
The deduction can’t exceed the cost of the qualifying property. Alternative rules govern how you can partially qualify a property’s lighting systems, known as the Permanent Rule and the Interim Rule.
If the IRS allows a deduction under IRC Sec. 179D regarding an energy efficient property, your property’s taxable basis will be reduced by the amount of allowed deductions.
Preserving the Planet by Saving Energy
It should be added that you can’t do these improvements yourself. Any construction work must be done by a licensed contractor well-versed in the details of 45L and 179D eligibility. Fortunately, we here at Engineered Tax Services are both tax and engineering experts, and we have many years of experience in delivering successful 45L and 179D tax and engineering studies.