The Inflation Reduction Act’s Impact on Sections 45L and 179d

The Inflation Reduction Act of 2022 (the Act) contains $433 billion in new spending over the next decade in areas such as:

·       $369 billion for energy security,

·       $64 billion for the extension of the Affordable Care Act subsidies, and

·       $739 billion in new revenues.

The Act also includes a 15-percent minimum tax on corporate book income, $124 billion for IRS audits of high-income taxpayers, and closing the carried-interest loophole.

But what does it mean for companies like yours? Here are some highlights.

Reach out to us for more information regarding your specific concern.

Section 45L Update Summary

The Inflation Reduction Act includes $369.75 billion in Energy Security and Climate Change programs over the next ten years, through December 31, 2032. Specifically:

·       Units acquired in 2022 use the existing standards and credit amounts.  

·       Units acquired in 2023 that later switches to Energy Star standards. Energy Star certification is the pathway to 2023 and future 45L tax credit qualification.

·       Single Family Residential credit increased to $2,500 for Energy Star Certification or $5,000 for Zero Energy Ready Homes; multifamily cut to $500 or $1000.

·       The higher credit amount is for when they meet the Zero Energy Ready Home Program (part of Energy Star).

·       Multifamily credit increases to $2,500 or $5,000 if the prevailing wage requirement is met.

·       The basis of Low-Income Housing Tax Credits (LIHTC) property is not affected by the 45L credit.

 

Section 179d Update Summary

The effective date for the following changes to Section 179d for large buildings are for tax years beginning after December 31, 2022, and include:

1.     The amount a taxpayer can deduct up front is the lesser of either (1) the cost of the retrofit or (2) the result of a complex formula built around an efficiency engineering standard, ASHRAE Standard 90.1.

2.     A new construction/addition projects deduction increase to $2.50 – 5.00/sq ft for 25%-50% energy savings that meet new prevailing wage and apprenticeship requirements. (An increase of $0.10 in deduction per percentage increase from 25% to 50%.)

a.     Otherwise, it is the deduction of $0.50 – 1.00/sq ft for 25%-50% energy savings. (An increase of $0.02 per percentage point.)

3.     Inflation adjustment restarts in 2023.

4.     No more partial deduction or interim lighting deduction

5.     Partial qualifications will be replaced with a new subsection “Alternative Deduction for Energy Efficient Building Retrofit Property,” incorporating:

a.     Qualified retrofit effective date is for property placed into service after 12/31/2022 under a retrofit plan established after 12/31/2022.

b.     Alternative deductions for qualified retrofits of buildings in service at least five years

c.      A retrofit plan (similar to an ASHRAE Level II Audit) is prepared by a licensed architect or engineer prior to improvements being made.

The best way to claim these deductions is to work with our tax professionals to help maximize your deductions. Give us a call.

Other Considerations

In addition to the above, the Act also incorporates:

·       A new 15% corporate minimum tax on corporations with financial statement income with certain modifications of more than $1 billion.

·       Expanding the limit of preferential long-term capital gains treatment for certain carried interests, effective for tax years ending after Dec. 31, 2022. The extended, five-year limitation would not apply to individuals with less than $400,000 of adjusted gross income or to income recognized with respect to an API that is attributable to a real property trade or business.

·       New energy credits and enhances or extends some existing credits and deductions.

·       A 1% excise tax on stock buybacks (applies to repurchases of stock after December 31, 2022)

·       The reinstatement of Superfund taxes on crude oil and petroleum products (effective January 1, 2023)

·       Scope narrowing of the proposed corporate AMT

·       A two-year extension of the Section 461(l) loss limitation as a revenue raiser

·       Additional IRS funding

We are keeping an eye on this developing story and will share updates as they come to light. In the meantime, please reach out to us for specifics about how the Inflation Reduction Act could impact your business.