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Energy Credit Applications: 45L vs 179D

Dec 12, 2023

Explore the intricate world of energy credits, focusing on 45L and 179D. EisnerAmper and Capstan Tax Strategies discuss the significant changes brought about by the Inflation Reduction Act and dive into the differences between these two credits, including candidate eligibility, height restrictions, potential savings, and the impact of prevailing wage requirements.

In this episode of Breaking Ground, EisnerAmper's podcast dedicated to real estate, our hosts focus on energy credits, specifically 45L and 179D. They also cover the changes brought about by the Inflation Reduction Act (IRA) in August 2022, and how this legislative update extended and expanded energy incentives.

179D Deduction Eligibility

The key factor for 179D eligibility is square footage, meaning it’s meant for commercial projects like warehouses or office buildings. The IRA expanded eligibility to government buildings and tax-exempt entities, including churches, private schools, Native American tribal governments, and nonprofit organizations.

Depending on how efficient your project is modeled under ASHRAE standards, you can qualify for up to $5 per square foot, an increase from $1.88. However, you also need to consider prevailing wages. If you don’t, you still can take the deduction, but it maxes out a $1 per square foot. The caveat to this is if you started a project before January of 2023 and you completed it in 2023 or beyond, you get grandfathered into that prevailing wage requirement.

Qualifying for the 45L Tax Credit

The 45L tax credit has been expanded under the IRA. Previously, 45L was a $2,000 per unit credit for residential buildings of three stories or less. The height restrictions have been eliminated, allowing eligibility for single-family homes, multifamily apartment buildings, condominium projects, additional dwelling units, assisted living, and student housing. The credit has been increased to $5,000 per unit, with two tiers: up to $2,500 or the full $5,000, depending on compliance with ENERGY STAR certification and prevailing wage requirements.

It's important to think ahead when planning to leverage this credit, as certifications must be obtained upfront, impacting projects coming online after the program's initiation in 2023. The program, set to expire on December 31, 2032, is meant to encourage developers and builders to incorporate ENERGY STAR certification early into their projects, with prevailing wages playing a crucial role in determining the credit amount.

For more details on 45L and 179D, listen to the episode above and subscribe for more episodes of Breaking Ground.

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Avi Jacob

Avi Jacob is a Compliance Tax Manager in the Real Estate Services Group.

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