On Tuesday, August 16, 2022, President Biden signed the Inflation Reduction Act. This is a substantial piece of legislation that includes several revenue-raising provisions relevant to our clients.

A brief highlight of the changes and opportunities:

179D Energy Efficient Commercial Building Tax Deduction Improved And Expanded

Major improvements to the §179D are as follows:

• 179D tax deduction has been significantly increased from the current maximum of $1.88 per square foot to $5 per square foot to reward the construction of energy efficient commercial buildings and multifamily buildings that are four (4) stories or taller.

• A special provision for performance-based qualification methodology is included for retrofitting commercial buildings providing greater opportunities for Retrofits.

• REITs will now have the ability to utilize 179D tax deductions for purposes of computing earnings and profits
• Tax-exempt building owners (such as non-profits) will gain the ability to allocate 179D tax deductions to architects, engineers, and designers responsible for designing a building’s energy efficient systems. Previously, only government building owners could allocate these tax deductions to their designers.

• Energy efficient commercial buildings placed in service after January 1, 2023, will have the opportunity to qualify under IRA provisions and increase the §179D from $1.88/SF to $5.00/SF.

Additional qualification criteria changes are also effective for properties placed in service from January 1st, 2023 through December 31st, 2032.

45L Tax Credit for Energy Efficient Homes Extended And Increased

The current version of §45L provides a credit of $2,000.00 per unit for qualifying residential homes or apartments placed in service through December 31, 2022. We recommend moving forward now on any projects placed in service in 2022, as the qualification standards beyond 2022 are much more difficult to qualify for.

 Beginning in 2023, there are major changes to the qualifying standards for the 45L Credit.

1) New homes certified under the ENERGY STAR Residential New Construction, or the ENERGY STAR Manufactured New Homes programs sold or rented after December 31, 2022, will be eligible for a $2,500.00 tax credit. The new guidance increases the credit to $5,000.00 if the units are certified under the Zero Energy Ready Homes Program (ZER).

2) Dwellings certified under the ENERGY STAR Multifamily New Construction National Program will also be eligible for these benefits, including high-rise projects, though the amount of the credit will be reduced under the Act if prevailing wage requirements are not followed. The Act also mandates a lower-based line credit of $500 per unit for multifamily units.

These credits remain in effect through 2032.

Doubles R&D Credit Potential For Small Businesses and Startups

Currently small businesses that do not have enough income tax liability to take advantage of their research and development credit may apply up to $250,000 of the credit towards their social security payroll tax liability. To qualify, the small business must have less than $5 million of gross receipts and be less than 5 years old.

The new law would permit an additional credit of up to $250,000 to be applied against the Medicare payroll tax for tax years beginning after December 31, 2022.

The expanded R&D tax credit probably won’t show up on tax returns until 2024 since it can first be claimed for tax year 2023, but it could provide a boost for small businesses and startups.

Passthrough Loss Limitations Extended

The Act includes a further extension of the excess business loss limitation of $500,000 annually, as it applies to partnership and S corporations, through 2028.

 Funding For IRS Enforcement

An investment of $80 billion over the next 10 years for IRS taxpayer services, enforcement, operations, and business system modernization.

What Is Not In The Bill

Among the most notable items previously discussed in the Build Back Better Act that are missing from the Inflation Reduction Act of 2022 are the following:

• No changes to the estate and gift tax rules.
• No increases to the tax rates on high earners.
• No change to the tax rates applicable to individuals on long-term capital gains.
• No increase to the corporate income tax rate, which remains at a flat 21%.
• No change to the like-kind exchange rules.

The IRS and the Treasury will need to provide further guidance for many of these changes, particularly with respect to tax credits. We will continue to monitor any clarifications issued.

For questions about how these changes may impact you, please contact us at 312-697-7187 to learn more or email info@meridianfinancialsolutions.com