On Aug. 16, President Joe Biden signed into law the Inflation Reduction Act (IRA) of 2022. Although it garnered headlines mostly for its $80 billion commitment to the Internal Revenue Service, the IRA went a long way toward providing tax incentives to real estate and related industries.

Selecting a few primary issues from the IRA, as with any large-scale legislation, can be a challenge. For example, the IRA provides new credit for zero-emission nuclear power production, but that is probably of little consequence locally. With that in mind, here are but a few of the main tax benefits in the IRA most relevant to the local real estate industry:

Section 179D deduction

Section 179D provides for accelerated cost recovery, in the form of a tax deduction, for certain energy efficient commercial building (EECB) property. The deduction is permitted for the year the property is placed in service. The IRA lowered the minimum EECB standard from a 50 percent reduction in total annual energy usage and power costs to a 25 percent reduction.

The IRA modifies the formula for calculating the maximum benefit, by switching to the concept of an “applicable dollar value” (ADV) multiplication factor. Notably, the ADV can be increased if certain prevailing wage and apprenticeship requirements are satisfied.

The IRA also contemplates the EECB property could be installed on or in “tax-exempt” property, which could lead to expanded applicability of the deduction. All in all, the changes to the Section 179D deduction are worthy of a careful read.

Section 45L tax credit

Section 45L provides a new-energy-efficient-home credit for certain eligible contractors. The IRA pushes out the applicability of the tax credit to qualified new energy-efficient homes acquired before Jan. 1, 2033 (an 11-year increase in the tax credit). The total credit can now be up to $5,000.

For single-family homes, requirements are tied to Energy Star single-family new construction program requirements, which change over the period of the tax credit. On the multifamily housing side, the applicability is tied to Energy Star multifamily new construction program requirements.

Additionally, certain prevailing wage requirements may apply; however, the statute does provide certain provisions that permit noncompliance to be fixed.

Section 45Q tax credit

Section 45Q provides a tax credit for qualified carbon oxide captured by a taxpayer at a qualified facility. The IRA extends this tax credit to qualified facilities that begin construction between Dec. 31, 2022, and Jan. 1, 2033 (which, for obvious reasons, presents a limited timing planning concern if you are in the process of commencing construction on such a facility). The IRA will also apply to certain carbon-capture equipment placed in service before Feb. 8, 2018. Thus, we see an expansion of this tax credit that looks to the past and the future.

Additionally, the IRA reduces the minimum annual capture requirements to make the tax credit more widely available. For example, other than direct air capture and electric generating facilities (each of which has its own standard), the general rule is now a requirement the facility capture at least 12,500 metric tons per year.

Anecdotally, conversations around carbon credits – and Section 45Q, in particular – have picked up in recent months. This is a provision I will be watching closely over the next months and years.

IRS enforcement

The IRS received a substantial appropriation in the IRA. Although not specific to the real estate and construction industries, it is important to note that this agency, which is critical to the interpretation of our many tax provisions, should start seeing a direct infusion in terms of hiring in the very near term. Some may see this as a harbinger of future tax audits, and that may be true. But we should also see this as a sign that guidance for the many tax laws that have been (and will be) enacted is in the offing. And that is something from which we all could benefit.

This column is intended to provide readers with general information and not legal advice. Consult professional counsel for help regarding specific situations.

Column first appeared in the Oregon Daily Journal of Commerce on October 14, 2022.

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