The Inflation Reduction Act (IRA) was signed into law on August 16, 2022 and includes some incentives that could impact the commercial real estate market. A key benefit includes the expansion of tax incentives for constructing energy-efficient buildings or retrofitting older buildings to achieve higher energy-efficiency standards.
The Inflation Reduction Act Includes Energy Tax Incentives
Under the Inflation Reduction Act, there are two energy tax incentives that commercial real estate owners can benefit from. These tax incentives include the tax deduction known as 179D and the tax credit known as 45L.
With 179D, commercial real estate owners stand to earn money if they meet certain energy efficiency requirements. Based on standards set forth by ASHRAE, owners can make upwards of $5/sq. ft. based on new or retrofitted construction.
To further break down 179D’s incentives, it operates on a tiered system. In relation to ASHRAE’s ratings, benefits start at $2.50/sq. ft. for a 25% energy reduction. The price rises 10 cents for every percentage increase and caps off at $5 — meaning it rounds off at 50%. This also only applies to organizations that pay workers prevailing wages, as organizations that don’t only stand to receive $1/sq. ft.
Commercial Observer notes that “it is extremely likely that buildings can qualify for this credit, whether through appliance changes, new HVAC systems, heat pumps, or building envelope upgrades that help improve insulation.”
On the other hand, 45L is targeted towards multi-family landlords. It originally expired on December 31, 2021 — but now has been extended through December 31, 2032 under the Inflation Reduction Act. To qualify, multi-family dwellings must be 50% more energy efficient than standard dwellings.
45L has now gone from a maximum $2,000 credit to $5,000. According to Real Estate Industry Insights, “An increased credit of $5,000 per unit for dwelling units that meet the more stringent Zero Energy Ready Home program, according to the Department of Energy as in effect on January 1, 2023 (or any successor program determined by the Secretary).”
Furthermore, there’s also “An increased credit of $1,000 per unit if multi-family homes meet the requirements of the Zero Energy Ready Home program.”
Sustained Clean Energy Efforts
Outside of commercial real estate, the Inflation Reduction Act will prove over the next few years to be beneficial for homeowners as well. On the federal, state, and local levels, the Inflation Reduction Act has allocated funds for sustainable and energy efficient household equipment.
According to RMI, such funds have been allocated for energy efficient heat pumps to heat and cool the home; new windows, insulation, sealing ductwork, and doors; induction cooktops; and upgraded electric panels and wiring.
Understanding the Inflation Reduction Act with Donnelly
At Donnelly Mechanical, we are dedicated to providing New York City businesses with the energy efficient equipment they need to thrive amidst new legislation. To learn more about Donnelly’s services and our commitment to helping and educating you, please visit our website and contact us today!