Inflation Reduction Act: Expansion of Energy Incentives 179D & 45L

The recently passed Inflation Reduction Act of 2022 focuses primarily on incentivizing taxpayers and businesses to invest in “green” and renewable energy. Included in these incentives are the expansion of the Section 179D deduction and the extension – and potential increase – of the 45L credit.

Section 179D is a deduction available for energy efficient residential properties, which are four stories or taller, and commercial properties. The Inflation Reduction Act states that effective Jan. 1, 2023, several changes take effect, including:

• Decrease in the required energy reduction from 50% to 25% compared to the listed standards
• Potential to earn varying rates of the deduction, ranging from $0.50 to $5.00 per eligible square foot
• Removal of the partial qualification
• Qualified “retrofit” plans may qualify

The 45L credit is available for energy efficient single-family, manufactured, and multifamily residences. The credit expired as of Dec. 31, 2021, but has now been extended in its original form through Dec. 31, 2022. Effective Jan. 1, 2023, the Inflation Reduction Act makes the following changes to the credit:

• Depending on the type of residence and standards used, properties may be eligible for credits ranging from $500 to $5,000 per unit – up from the former maximum of $2,000 per unit.
• Residential properties that exceed three stories are now eligible to qualify for the credit.

Beyond the changes to Section 179D and the 45L credit – and to the relief of real estate owners – the Inflation Reduction Act did not change the benefits of 100% bonus depreciation. This means the opportunity still exists to have a cost segregation analysis performed on acquired, renovated, or construction projects, thereby identifying opportunities to accelerate depreciation. (Owners should be aware, however, that bonus depreciation is scheduled to decrease from its current rate of 100% to 80% for tax year 2023 and will continue to decrease by 20% per year until it reaches 0% in tax year 2026.) Thus, when 179D or 45L are combined with a cost segregation analysis, the potential tax savings are significant.

KSM will continue to provide information on these credits and incentives as it becomes available. In the meantime, please reach out to your KSM advisor or complete this form.