Energy-Related Tax Incentives Create Significant Opportunities for the Real Estate Industry
The Inflation Reduction Act of 2022 (the Act) includes several new and extended federal energy-related tax initiatives designed to incentivize businesses and individuals to boost their use of renewable energy.
02.23.24
Among the tax incentives afforded under the Act are four key provisions that create significant opportunities for the real estate and construction industries, each of which provides for greatly enhanced tax incentives if certain prevailing wage and apprenticeship requirements described below (the Prevailing Wage/Apprenticeship Requirements) are met. Significantly, the Act also permits businesses generating certain of these tax credits to monetize them via a sale. The U.S. Treasury Department and the IRS are in the process of issuing piecemeal guidance in the form of proposed regulations and website portals regarding the interpretation and implementation of the provisions of the Act. The current state of play regarding these four key provisions may be briefly described as follows:
Investment tax credit for energy property
- This is a tax credit equal to a percentage of the cost basis of certain types of energy property a taxpayer places in service during the taxable year.
- The credit percentage is generally 6% but is increased to 30% if the Prevailing Wage/Apprenticeship Requirements are met.
- The tax credit applies to renewable energy properties, including solar energy property, fiber-optic solar energy property and electrochromic glass property, geothermal energy property, qualified fuel cell property, qualified microturbine property, combined heat and power system property, qualified small wind energy property, geothermal heat pump equipment, qualified biogas property and microgrid controllers.
- Energy projects that are placed in service within certain brownfield, low-income or traditionally coal- or fossil fuels-based communities and energy projects that utilize a requisite amount of “domestic content” (i.e., steel, iron or manufactured products that are manufactured or produced in the United States) could qualify for additional bonus credits.
New home energy-efficient tax credit
- This is a tax credit available to eligible building contractors for new energy-efficient homes sold or rented for use as a residence.
- For single-family homes, the tax credit is $2,500 per home meeting the Energy Star standards or $5,000 per home certified as a zero-energy ready home.
- For multi-family homes, the tax credit is $500 ($2,500 if the Prevailing Wage Requirements are met) for homes meeting Energy Star standards or $1,000 ($5,000 if the Prevailing Wage Requirements are met) for homes certified as zero-energy ready homes. (For purposes of this credit, the Apprenticeship Requirements do not apply.)
Tax deduction for energy-efficient commercial building property
- This is an up-front cost recovery deduction for energy-efficient interior lighting, building envelope, HVAC and hot water systems for commercial buildings.
- The deduction is equal to $0.50-$1.00 per square foot (increased to $2.50-$5.00 per square foot if the Prevailing Wage/Apprenticeship Requirements are met), depending on the extent to which energy efficiency is increased.
Alternative fuel vehicle refueling property tax credit
- This is a tax credit equal to 30% of the cost of any electric charging infrastructure and other alternative fuel refueling property placed in service in a low-income or rural area during the taxable year. The credit is reduced to 6% for depreciable property used in a trade or business if the Prevailing Wage/Apprenticeship Requirements are not met.
Prevailing Wage/Apprenticeship Requirements
- As noted, businesses meeting certain prevailing wage and apprenticeship requirements can qualify for significantly higher tax credits and deductions.
- Prevailing Wage Requirements. In order to satisfy the prevailing wage requirements, the business must ensure (and maintain and preserve sufficient records to show) that any laborers and mechanics employed by the business, any contractor or subcontractor for the construction, alteration or repair of an energy project are paid wages at rates at least equal to the prevailing rates for construction, alteration or repair of a similar character pursuant to local guidelines as most recently determined by the U.S. Department of Labor in accordance with the Davis-Bacon Act.
- Apprenticeship Requirements. In order to satisfy the apprenticeship requirements, a labor hours requirement, a ratio requirement and a participation requirement must all be satisfied. The labor hours requirement is satisfied if at least the applicable percentage (15% for construction commencing after December 31, 2023) of total labor hours performed in the construction, alteration or repair of the facility are performed by qualified apprentices under a registered apprenticeship program. Under the ratio requirement, the project must meet the ratio of apprentices to journeyworkers established by the registered apprenticeship program for the apprentices in any occupation working on the job site each day. The participation requirement is met if each business (or contractor or subcontractor) that employs four or more individuals to perform construction, alteration or repair of the facility also hires at least one qualified apprentice. Businesses are required to maintain and preserve records to establish compliance with the apprenticeship requirements.
Monetizing the tax credits
- Significantly, the Act permits businesses to sell all or a portion of certain of these energy tax credits to one or more unrelated persons. Cash payments in connection with these sales are tax-free to the seller and nondeductible by the buyer. The Act also permits tax-exempt entities and certain other organizations to claim the equivalent amount of tax credit in the form of a direct payment from the IRS.
We will continue to monitor the guidance being issued regarding these tax incentives and would, of course, be happy to provide advice and assistance in connection with determining whether and to what extent these tax incentives are available in connection with anticipated real estate development and construction activities, monetizing any available credits via a sale or otherwise taking full advantage of these tax incentives. Please contact Larry Arem, Mark Berg or Sarah Herman with any questions or to discuss these matters.
Co-authors Mark Berg, chair, Larry Arem, partner, and Sarah Herman, associate, are members of the tax practice group at Klehr Harrison.