March 31, 2023

Inflation Reduction Act Offers a Variety of Green Building Tax Incentives

Holland & Knight Retail and Commercial Development and Leasing Blog

Marcy Hart | Holly R. Camisa | Maria Z. Cortes | Olufunke Leroy

The IRS is currently in the process of implementing the Inflation Reduction Act of 2022 (IRA), which addresses energy, tax and health policy. According to the U.S. Environmental Protection Agency (EPA), "The Inflation Reduction Act of 2022 is the most significant climate legislation in U.S. history." The IRA offers, among other incentives, tax credits to an array of organizations (e.g., businesses, nonprofits, educational institutions, and state, local and tribal governments). The IRA even allows certain nonprofits to transfer their tax incentive to contractors.

IRA tax credits are applied to reduce the costs of renewable energy. Taking advantage of such tax credits can help to significantly reduce greenhouse gas (GHG) emissions and accelerate the transition to clean energy. The IRA emphasizes providing cleaner air to disadvantaged populations; for example, it is projected to help prevent 3,900 premature deaths and reduce the number of asthma attacks in American by 100,000 each year by 2030. It is also expected to protect nearly 2 million acres of national forests. Additionally, the average family is expected to save an average of $500 annually on energy costs, with ample opportunities to save more (such as through clean energy and electric vehicle (EV) tax credits, which will save more than $1,000 each year).

The Energy-Efficient Commercial Buildings Tax Deduction offers significant opportunities to the real estate community to transition to clean energy and thus, ultimately, reduce energy costs. This tax incentive is available to the commercial, construction, state government and federal government sectors. Eligible technologies include equipment insulation, water heaters, lighting, lighting controls/sensors, chillers, furnaces, boilers, heat pumps, air conditioners, caulking/weather-stripping, duct/air sealing, building insulation, windows, siding, roofs, comprehensive measures/whole building and tankless water heaters. The amount of this tax deduction, which is adjusted annually for inflation, is currently $0.30 – $1.80 per square foot, depending on the technology and amount of energy reduction.

The Renewable Electricity Production Tax Credit (PTC) is a corporate credit tax available to the commercial and industrial sectors. Eligible technologies include geothermal electric, solar thermal electric, solar photovoltaics (PV), wind, biomass, hydroelectric, municipal solid waste, landfill gas, tidal, wave, ocean thermal and offshore wind. Unused credits may be carried forward for up to 20 years after their year of generation or carried back one year by filing an amended tax return.

The U.S. Department of Energy's (DOE) Loan Guarantee Program is available to the commercial, industrial, local government, nonprofit, school, state government, agricultural and institutional sectors. Eligible technologies include geothermal electric, solar thermal electric, solar thermal process heat, solar PV, wind, biomass, hydroelectric, fuel cells using non-renewable fuels, landfill gas, tidal, wave, ocean thermal, daylighting and fuel cells using renewable fuels. The loan must be fully repaid over a period not to exceed the lesser of 30 years or 90 percent of the projected useful life of the physical asset being financed.

While the IRS' guidance is forthcoming, the EPA has made the following additional tax credits and incentives available: