On August 16, 2022, President Biden signed into law the $430 billion Inflation Reduction Act (IRA). The bill contains several green energy tax incentives intended to combat climate change, including the expansion of commercial solar panel credits, 179D deductions, and 45L and 45Q credits.
Commercial Solar Panel Tax Credit Extension
The legislation extends the 30% commercial solar panel tax credit to 2034, but a phase-out will begin in 2032. It also accelerates the depreciation schedule for commercial solar panels to 5 years, even though most commercial solar panels can last up to 30 years.
179D Tax Deduction Expansion
Real estate companies who build new or renovate older four-story or higher, energy efficient, commercial or multifamily buildings can take advantage of the 179D tax deduction. The IRA increased this deduction significantly, from a maximum of $1.88 to $5 per square foot. The bill also allows real estate investment trusts (REITs) to compute earnings and profits using the deduction. Real estate investors may now deduct significantly more of their cost for energy-efficient contributions in the year an asset is built or improved rather than over the life of the asset via depreciation. Tax-exempt building owners also have the option to allocate the tax deduction to their architects, engineers and designers who created the building’s energy-efficient systems.
45L and 45Q Tax Credit Expansions
The IRA reinstates the 45L tax credit, which expired in 2021, through 2032. The credit will increase in 2023 from a maximum of $2000 to $5000 per dwelling unit for both single- and multifamily developments. The bill also extends the benefits to all residential developments, regardless of size.
The legislation increases the 45Q tax credit from $20 to $60 per metric ton of permanently stored carbon dioxide. The tax credit will apply to any new or existing buildings that begin construction in the next ten years and capture a minimum of 12,500 metric tons of carbon. Building owners do not need to meet the minimum threshold for each building. Instead, they can combine several projects from their portfolio to meet that minimum.
What This Means for Your Business
The green energy incentives passed in the IRA provide increased cash flow and considerable tax savings early in a project’s life cycle for real estate companies and their investors. Real estate companies looking to “Go Green” now have a significantly higher incentive to do so.
IRA Green Energy Tax Incentives and Your Business
If you have any questions about how the green energy tax incentives could apply to your business, the Moore Colson Tax Practice is here to help. Contact us for more information.