Contact BRAYN for an initial consultation. We will work with you one-on-one to determine your roadmap for success!
10620 Southern Highlands Parkway Suite 110-473 Las Vegas, NV 89141
PO Box 735017, Dallas, TX 75373-5017
September 28, 2023
By Kevin Sullivan, PE, HERS Rater
Partner, BRAYN Consulting
The transition to renewable energy is not just an environmental imperative but also a financial opportunity. As a building owner or developer, you might be contemplating the switch to greener energy solutions, weighing the costs and benefits.
What you may not know is that there are substantial tax incentives available that can significantly offset your initial investment. This article aims to demystify the tax credits and incentives available in the US for 2023, focusing on commercial buildings owned by private property owners, governments, and tax-exempt organizations.
The Financial Landscape of Renewable Energy in 2023
Before looking into the tax incentives, it's essential to understand the financial landscape of renewable energy. The upfront costs can be daunting, but the long-term savings are substantial. Solar panels, for instance, can have a payback period as short as 5-7 years, depending on your location and energy consumption (1).
According to a 2023 Renewable Energy Industry Outlook by Deloitte, the renewable energy sector in the U.S. is poised for significant growth, driven by robust demand and a raft of clean energy incentives under the Inflation Reduction Act (IRA). However, the industry also faces challenges that have carried over from 2022, such as rising costs, supply chain disruptions, trade policy uncertainties, and inflation. These factors create strong headwinds but are balanced by the sector's long-term growth prospects (2).
What Are These Tax Incentives?
Section 48 Energy Credits
Also known as the Investment Tax Credit (ITC), Energy Credits provide significant savings for building projects that include renewable systems:
The base credit is 6% of the renewable system cost, but for most projects, the credit will be at least 30% (unless the system is over 1MW electrical output or storage – which is a lot). Below is a breakdown of the credits and bonuses:
6%
Base Credit
+24%
Bonus Credit - projects that start before 01/29/23, OR meet prevailing wage requirements, OR are under 1MW max net output or storage.
+10%
Domestic Content Bonus – projects built with 100% US steel/iron & 40% US manufactured products.
+10%
Energy Community Bonus - projects located near a coal plant closure or meet certain unemployment criteria.
+10-20%
Low-Income Bonus - IRS allocation for wind or solar projects in low-income areas, tribal lands, or part of a low-income residential project.
The credits are available to property owners, governments, and tax-exempt organizations.
Real-Life Examples
Example 1: Low-Income Housing Development with Solar
A developer plans to build solar panels on their project. The federal government essentially covers 30% of the total cost because of the solar capacity. This project is located in an area that allows for an additional 10% Energy Community Credit. So, the solar system costs $1,000,000, but the developer only pays $600,000 after claiming the credits.
Example 2: High School Project with Geothermal
A school district is interviewing architecture firms for a new high school and is considering a geothermal system for energy savings even though the cost is $10M. An informed architecture firm advises the district that Energy Credits will save them $3M, helping the firm win the contract and facilitating a more sustainable project.
Example 3: Hospital Combined Heat & Power (CHP) Upgrade
A hospital completed a CHP system retrofit in 2023 to meet resiliency requirements and energy demands for electricity, hot water, and heating/cooling. The $7.5M project qualifies for a 30% credit, so the hospital system will apply for a direct payment from the IRS of over $2M.
Example 4: Landfill Renewable Natural Gas (RNG) Project
A county decides to sell landfill natural gas (LNG) to a developer who will build an RNG facility to turn waste gas that would otherwise be burned into a beneficial renewable source of fuel. The $30M project qualifies for a 30% credit of $9M. The developer cannot use the tax credits, so they are sold on the open market.
Technology Neutral
The tax credits will be technology-neutral for the most part for projects that start construction after 2024. While the listed technologies above (solar, geothermal, etc.) will likely still be eligible, additional technologies may qualify for the credits if they have a greenhouse gas emissions rate not greater than zero.
How to Maximize the Credits
Determining project eligibility, applicable credit and bonus credit percentages, tax implications, and eligible project costs is critical to maximizing the credits. This requires an understanding of tax law, regulatory guidance, engineering, and construction.
For example, since the credit is directly based on the cost of the renewable system, it is imperative to include all costs eligible for the credit. The law, regulations, court cases, Treasury decisions, IRS guidance, rulings, and advice must be leveraged to include not only material and labor costs, but also eligible soft costs, indirect costs, and incremental costs associated with the system. An understanding of the design and construction of the system is required to capture these costs, and they can increase the credit by more than 20%.
Seeking professional guidance from BRAYN’s team of attorneys, accountants, tax professionals, building scientists, and engineers will ensure you take full advantage of the tax savings on your renewable projects.
What Other Incentives Are Available for Sustainable Construction?
179D Energy Efficient Commercial Building Deduction
While Energy Credits provide tax savings for the production and storage of energy, 179D provides savings for the efficient use of energy. The benefits for commercial buildings completed after 2022 are now up to $5.00 per square foot for exceeding certain energy efficiency standards. Prevailing wage and apprenticeship requirements must be met if construction starts after 01/29/2023, or the maximum deduction drops to $1.00 per square foot.
Building Owners
Building owners and developers can take advantage of this incentive on projects they build or renovate. Even Real Estate Investment Trusts (REITs) are eligible to immediately deduct 179D Deductions for the first time.
Example 1: 4-Story Low Income Housing Development
A developer constructs 150 low-income housing units in a 150,000-square-foot building. Although the building is residential, because it is over 3 stories it is considered commercial and therefore eligible for 179D. Also, HUD financing on the project requires prevailing wages so the project qualifies for the maximum deduction and allows the developer to accelerate $750,000 in tax deductions.
Example 2: Office Building Renovation
A REIT decides to upgrade the HVAC system in a 120,000-square-foot office building. The project started construction in 2022 and is completed in 2023, so prevailing wage and apprenticeship requirements are not necessary. The energy efficiency of the renovated system allows for the immediate accelerated tax deduction of $5.00 per square foot, totaling $600,000.
Architects, Engineers, Contractors
The 179D Deduction is even more valuable to designers and builders of energy-efficient buildings. Because government and tax-exempt building owners cannot benefit from the 179D tax savings, the law allows them to allocate the incentive to the designers and builders of their HVAC, Interior Lighting, and Building Envelope systems.
Example 3: Architecture Firm – High School
An architect designs a 200,000-square-foot high school and provides administration during construction which is completed in 2023. Although other consultants are eligible for the 179D Deduction for their work on energy-efficient systems, the architecture firm had the foresight to secure the allocation from the school district early and claims $1,000,000 in tax deductions for their role in the design of a sustainable project!
How to Maximize 179D Deductions
Whether a building owner or designer, projects completed in the last few years can still claim the deductions. For designers, it is important to review your backlog of work to secure allocations of 179D Deductions from your building owner client sooner rather than later. Several consultants on the project are likely eligible for the incentive, and once 179D has been allocated you are out of luck.
45L Residential Energy Efficiency Tax Credit
Like 179D, 45L provides a tax incentive for the efficient use of energy, but in this case for residential buildings. Homebuilders and residential developers can claim $2,500 to $5,000 for every home or unit they build. ENERGY STAR certification is required for 2023, but projects completed in past years can still claim $2,000 per home or unit without ENERGY STAR certification.
Example 1: 4-Story Low Income Housing Development
The same project in Example 1 in the 179D section above is also eligible for 45L Tax Credits. The 150-unit complex is designed and built to meet ENERGY STAR requirements and can therefore claim $2,500 per unit, totaling $375,000 in tax credits. These credits no longer reduce Low Income Housing Tax Credits (LIHTC), so the developer can take advantage of all 3 incentives!
How to Maximize 45L Tax Credits
The first step in maximizing the tax credits is looking at projects completed in the last 3 years. The qualification requirements were easier to meet, and you can still amend those tax credits. Moving forward, it is important to involve BRAYN during the design of each project since ENERGY STAR is now required. We can ensure minimal costs and advise on additional local utility incentives, mortgage insurance premium reductions (MIPs), grants, and other incentives that maximize the choice to build sustainably.
Conclusion
Switching to renewable and energy-efficient systems can be made easier by taking advantage of these tax incentives to reduce your initial investment costs. Involving BRAYN’s team of attorneys, accountants, tax professionals, building scientists, and engineers will ensure you claim every dollar available to you. By investing in professional guidance, you're not just buying peace of mind; you're investing in the long-term success and financial viability of your sustainable building project. So, as you embark on your journey towards a greener future, remember that the right expertise can make all the difference.
BRAYN Consulting LLC is a consulting firm that supports CPA firms and their clients in taking full advantage of various incentives, such as R&D Tax Credits, 179D Energy Efficient Commercial Building Deductions, 45L Energy Efficient Home Tax Credits, Cost Segregation, Carbon Sequestration Tax Credits, Investment Tax Credits, and Tax Controversy. BRAYN also provides Building Science Consulting for home builders and residential developers seeking Energy Code Compliance, HERS Ratings, ENERGY STAR, and Zero Energy Ready Home Certifications. BRAYN Consulting LLC is not a CPA firm, finance, tax, law, or engineering firm, and nothing contained herein can be construed as legal, financial, accounting, tax, or engineering advice.
IRS Circular 230 Disclosure - To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
Resources
https://www2.deloitte.com/us/en/pages/energy-and-resources/articles/renewable-energy-outlook.html
https://www.irena.org/Publications/2023/Feb/Global-landscape-of-renewable-energy-finance-2023
CONNECT WITH US