Important Update: The Proposed Build Back Better Act Heavily Modifies 45L and 179D Energy Efficiency Incentives
» View a Summary of the BBB Act from November 2021 and How It Pertains to These Tax Incentives

The Department of the Treasury has issued detailed information about the Biden Administration’s tax proposals for fiscal-year 2022. While the proposals seek to increase tax rates for corporations as well as those with the highest incomes, it offers several enhancements to tax incentives for energy efficiency and renewable energy. If passed, the legislation would make both the 45L Energy Efficient Home Credit (45L Credit) and the 179D Energy Efficient Commercial Building Deduction (179D Deduction) more advantageous.

THE 45L ENERGY EFFICIENT HOME CREDIT

Currently, the 45L Credit allows eligible developers to claim a $2,000 tax credit for each newly constructed or substantially reconstructed qualifying residence. It applies to single family homes, apartments, condominiums, assisted living homes, student housing, and other types of residences. The residences must be three stories above grade in height or less. The 45L Credit requires a HERS Rater, a credentialed professional who tests residential energy efficiency, to inspect the home, perform energy modeling and prepare certificates of compliance. The 45L Credit is set to expire at the end of 2021.

The proposal would increase the section 45L tax credit for an energy efficient home from $2,000 to $2,500 and extend the tax credit five years to December 31, 2026. The proposal would also modify and expand the dwelling units eligible for the credit. For new energy efficient homes, the required energy savings percentage would increase from 50 percent to 60 percent under the 2006 IECC standards. In addition, certified Energy Star homes would also be eligible for the 45L tax credit as well as dwelling units with annual heating and cooling consumption at least 15 percent below the annual energy consumption level of a comparable dwelling unit under the 2018 IECC standards. The proposal would be effective after December 31, 2021.

THE 179D ENERGY EFFICIENT COMMERCIAL BUILDING DEDUCTION

The 179D Deduction, often referred to as the EPAct Deduction, is a Federal tax incentive promoting energy efficient buildings for both new and existing structures. Further, architects, engineers, contractors, and other building design professionals may also be eligible for the incentive on public projects. Commercial building owners can take a Federal tax deduction of up to $1.80 per square foot of the building’s floor area if they install certain property (e.g., efficient lights or HVAC systems, added wall or roof insulation, etc.) that reduces energy and power costs. The 179D Deduction, which applies to both new construction and renovations, was made permanent by the ‘Consolidated Appropriations Act, 2021’. However, that Act significantly increased the energy efficiency standards needed to qualify.

The proposal would increase the maximum section 179D deduction per square foot from $1.80 to $3.00 for qualifying property placed in service after December 31, 2021. The partial deduction rate would be increased from $0.60 to $1.00 per square foot for qualifying property placed in service after December 31, 2021. The required efficiency standard in relation to the reference building’s total annual energy reduction would be adjusted from 50 percent to 30 percent. Similar to the 45L changes, the proposal would be effective after December 31, 2021.

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ABOUT ICS TAX, LLC

ICS Tax, LLC (ICS) is a consulting firm providing innovative tax planning strategies and specializes in both the 45L and 179D tax incentives. ICS collaborates with taxpayers and their tax professionals to identify credits and incentives that reduce tax liabilities and increase profitability. ICS provides nationwide service through its offices located throughout the country.