The Proposed ‘Build Back Better Act’ Makes Significant Changes to the 45L and 179D Energy Efficiency Tax Incentives

The Proposed ‘Build Back Better Act’ Makes Significant Changes to the 45L and 179D Energy Efficiency Tax Incentives

The Build Back Better Act, if passed, would provide significant changes to the 45L Energy Efficient Home Credit (45L Credit) and the 179D Energy Efficient Commercial Building Deduction (179D Deduction). These two energy efficiency tax incentives have promoted green construction for both commercial and residential construction. Below are summaries of the proposed changes.

THE 45L ENERGY EFFICIENT HOME CREDIT

The provision extends the Section 45L new energy efficient home credit through 2031.

Single Family and Manufactured Homes. In the case of new homes acquired after 2022 which are eligible to participate in the ENERGY STAR Residential New Construction Program or Manufactured Homes Program, the provision provides a $2,500 credit for energy efficient single family and manufactured new homes meeting certain energy star requirements.

  • Single-family homes must meet the most recent Energy Star Single-Family New Homes Program requirements applicable to such dwelling location as in effect on 1.) the latter of January 1, 2022 or January 1 of two calendar years prior to the date the home is acquired and 2.) National Program Requirement Version 3.1 for homes acquired before 2025 and Version 3.2 thereafter.
  • Manufactured homes must meet the most recent Energy Star Manufactured Home National Program requirements as in effect on the latter of January 1, 2022 or January 1 of two calendar years prior to the date the dwelling is acquired.

This provision provides a higher tier credit of $5,000 credit for eligible single family and manufactured new homes certified as a zero energy ready under the Department of Energy Zero Energy Ready Home Program.

Multifamily Homes. In the case of new homes acquired after 2022 which are eligible to participate in the ENERGY STAR Multifamily New Construction Program, provision provides a base credit of $500 and a bonus credit of $2,500 for multifamily units which meet

  • the most recent Energy Star Manufactured Home National Program requirements as in effect on the latter of January 1, 2022 or January 1 of two calendar years prior to the date the dwelling is acquired and
  • the most recent Energy Star Manufactured Home Regional Program requirements applicable to such unit as in effect on the latter of January 1, 2022 or January 1 of two calendar years prior to the date the dwelling is acquired.

This provision provides a higher tier base credit of $1,000 or a bonus credit of $5,000 for eligible multifamily unites certified as a zero energy ready under the Department of Energy Zero Energy Ready Home Program.

In order to claim the bonus credit amount with respect to a multifamily unit, taxpayers must satisfy prevailing wage requirements for the duration of the construction of such units.

THE 179D ENERGY EFFICIENT COMMERCIAL BUILDING DEDUCTION

Starting in 2022, the provision updates and expands the energy efficient commercial buildings deduction by increasing the maximum deduction, determined on a sliding scale. It also changes this maximum from a lifetime cap to a three- year cap. The provision updates the eligibility requirements so that property must reduce associated energy costs by 25% or more in comparison to a building that meets the ASHRAE standard affirmed by the Secretary as of four years prior to the date such building is placed into service.

The maximum value of the base deduction is $.50 per square foot, increased by $0.02 per square foot for every percentage point by which the designed energy cost savings exceed 25% against the reference standard, not to exceed $1.00 per square foot. The value of the bonus deduction is $2.50 per square foot, increased by $.10 per square foot for every percentage point by which designed energy cost savings exceed 25% against the reference standard, not to exceed $5.00 per square foot.

This provision allows taxpayers to elect to take an alternative, parallel deduction for energy efficient lighting, HVAC, and building envelope costs placed into service in connection with a qualified retrofit plan. The value of the base deduction is determined by the reduction in a building’s energy usage intensity (EUI) upon completion of the retrofit, equal $.50 per square foot, increased by $0.02 per square foot for every percentage point by which the reduction in EUI exceed 25%, not to exceed $1.00 per square foot. The value of the bonus deduction is $2.50 per square foot, increased by $.10 per square foot for every percentage point by the reduction in EUI exceed 25% against the reference standard, not to exceed $5.00 per square foot.

In order to claim the bonus deduction amount, taxpayers must satisfy prevailing wage and apprenticeship requirements for the duration of the construction of the project.
In order to qualify for the alternative deduction, a building retrofit project must reduce a building’s EUI by no less than 25%.

This provision allows tax-exempt entities to allocate the deduction to the designer of the building or qualified retrofit plan.

The amendments made by this provision expire after December 31, 2031.

 

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