The Inflation Reduction Act (IRA) of 2022 was signed into law by President Biden on August 16, 2022. This truly historic law includes $369 billion of federal climate-related funding. It is designed to reduce the nation’s carbon footprint by 40 percent of 2005 levels by 2030.
There are many things we know about the IRA and other implementation details that are being developed. Multiple federal and state agencies have yet to issue regulations, guidance, or distribute grants to determine how to move these historic amounts of dollars. Much of the IRA funding is in the form of tax incentives (credits, rebates, and direct pay) which are essentially guaranteed and will not run out based on demand.
The Philadelphia Energy Authority and the Philadelphia Office of Sustainability are working together to ensure that Philadelphia is best positioned to maximize opportunities from the IRA. We believe it is reasonable to target $5 billion in funding for Philadelphia in the form of formula and competitive grants, rebates and tax credits (institutional and consumer). This level of investment will generate approximately 50,000 clean energy jobs. Of this $5 billion, we anticipate that the majority of this funding will come to Philadelphia in the form of tax credits and payments.
Four Primary Provisions of IRA Relevant to Commercial Property Owners
- 179D tax deduction for energy efficiency improvements to existing and new commercial buildings
- 45L tax credit for energy efficiency in residential buildings – multifamily and single family
- Section 48 Investment Tax Credit (ITC) for renewable energy including solar, combined heat and power (CHP), and energy storage
- 30c tax credit for installation Electrical Vehicle (EV) charging stations (only applies to buildings in low income and rural areas)
They are broken out below by Energy Efficiency, Renewables/Solar and EV charging
Energy Efficiency
The IRA contains two major tax incentives for commercial property owners to reduce energy use in their buildings, for both new buildings and retrofits. Both incentives -179D (a tax deduction) and 45L (a tax credit) – are existing programs that were set to expire in 2021. The IRA extends these programs for 10 years and increases the dollar amount an owner can earn.
The 179D incentive provides owners and long-term lessees with a dollar amount per square foot if their commercial or residential buildings meet a certain efficiency standard. Owners of a new construction or retrofitted building can earn up to $5 per square foot, depending on its energy efficiency relative to the ASHRAE standard — a benchmark validated by the American Society of Heating, Refrigerating and Air-Conditioning Engineers that is updated every few years and varies by building type. See White House Guidebook, page 115 for details. Eligible improvements include: interior lighting, heating, cooling, ventilation, hot water, and building envelope.
The 179D deduction is a stepped benefit, beginning at $2.50 per square foot for a building with a 25 percent reduction in energy usage relative to the ASHRAE standard. Every percentage point thereafter adds 10 cents until the maximum of $5 for 50 percent or more energy savings. These numbers apply only to those owners who pay workers a prevailing wage and registered apprenticeship requirements. Those who don’t pay prevailing wage are eligible for a maximum of $1 per square foot.
The IRS has not yet published guidelines for the 179D deductions thus many details are still unclear. To qualify, owners will need a third party to certify the change in energy efficiency.
Design teams, which do pay federal taxes, can apply for this tax credit on behalf of government agencies and nonprofits enabling a reduction in overall project costs. In addition, owners can earn 179D benefits every three to four years, as long as a new capital event has led to additional reductions in the building’s carbon footprint.
The 45L tax credit is directed at residential property owners who can earn up to $5,000 per unit (single-family home or apartment) if they meet the criteria. Beginning in 2023, rentals that meet the Energy Star standard earn $500 per unit, while those that meet the zero energy ready homes (ZER) standard earn $5,000 per unit. Multifamily units must use prevailing wage labor to be eligible for the maximum incentive (otherwise their incentive is capped at $1,000 per unit).
Renewable Energy and Storage
The IRA extends the investment tax credit (Clean Electricity Investment Tax Credit (Sec. 13702)). There is a 10-year extension of 30% of the cost of installed equipment to be tax exempt, falling to 26% in 2033, and 22% in 2034. That 30% credit also applies to energy storage, meaning retrofits of batteries to solar arrays can benefit. The ITC is eligible for an additional 10% – 20% boost for projects in certain low-income communities and buildings. The ITC includes a 30% standalone credit for energy storage. Interconnection costs will be included for projects smaller than 5 MWac.
Very significantly, government and nonprofit properties are now eligible for direct pay. This means that building owners will be paid the equivalent of the tax credit to taxable entities. Previously, nonprofits had to enter into more complex financing arrangements with 3rd parties, making the projects less economical.
The IRA includes significant “adders” to raise the ITC beyond 30%. Projects featuring a minimum amount of domestically produced content are eligible for another 10% incentive. To reach that target, all steel and iron must be U.S. made and at least 40% of manufactured goods – solar panels, inverters, electrical gear – must qualify too, with certain percentages to rise in the future. Historically, Made-in-the-USA goods must feature at least 55% domestic content but the bill lists exceptions, permitting imports of materials not made to satisfactory quality or in sufficient numbers within the U.S. Domestic components which would raise project costs by more than a quarter can also be imported.
An additional 10% incentive is available to projects in designated “energy communities” – brownfield sites and former fossil fuel production areas. In the latter case, county subdivisions – or “census tracts” – and their immediate neighbors, are eligible as long as there has been coal, oil, or natural gas extraction since 2000.
EV Charging
30c: Property owners and investors interested in installing electric vehicle charging stations in their parking lots (or garages) in low-income or rural areas are now able to take advantage of the extended and modified Alternative Fuel Vehicle Refueling Property Credit. From 2023 through 2032, a 30% tax credit will be applied to this charging infrastructure up to $100,000 per item of property.
Summary
Over the coming months the Treasury Department will be issuing guidelines providing more specificity than what is known today.
The IRA is truly a once-in-a-generation opportunity for the U.S. to decarbonize. The Philadelphia Energy Authority is committed to sharing information and resources to help your organization take advantage of these opportunities. PEA and our green bank affiliate have many existing programs to assist with financing energy efficiency and solar as well as obtain a quote for solar on your property. We also run workforce training programs leading young people to jobs in the solar and building retrofit industries.
Please contact us at cpace@philaenergy.org to learn more.
Resources
Below are resources for you to explore about the IRA. Feel free to send us additional resources to add to this list at cpace@philaenergy.org
- The White House has an IRA Guidebook and a table with updates regarding status of the major provisions.
- Real Estate Roundtable fact sheet updated January 5, 2023
- ULI webinar September 2022
- Commercial Observer IRA and Commercial Property September 2022
- Globest.com IRA and Commercial Real Estate September 2022
- EDP Renewables Understanding the IRA
- Trane Resource Center
- Genie Solar Energy IRA Implications Solar November 2022
- Marcum LLP Renewable Energy Incentives November 2022