History was made on August 16th 2022, when Joe Biden signed the Inflation Reduction Act (IRA) into law, approving the largest climate investment on record. However, the opportunities and funds the bill affords businesses, and the routes needed to access them, can be a bit tricky.
In this article, we’ll look at some tax breaks the IRA offers tenants and building owners who make energy-efficient building improvements, and discuss how these standards can be met. We’ll then show how air quality monitoring and optimization can play an important part in your energy reduction strategy.
What is the 2022 Inflation Reduction Act?
The IRA aims to reduce carbon emissions and inflation, reform taxation, and improve healthcare. Of the $369 billion allocated to energy and climate change projects, more than $50 billion will fund clean energy technologies and improvements that will lower the cost of powering homes and commercial buildings, and reduce pollution.
Much of this investment will take the form of tax credits for building owners who maintain energy efficient standards on their sites. Achieving these credits can be highly lucrative - not just for the tax deductions, but also because implementing such improvements will provide long-term energy savings (especially given the recent sharp increase in energy prices).
Here are a few of the most rewarding credits available:
The Energy Efficient Commercial Buildings Deduction (179D)
The 179D offers up to $5 in tax savings for every square foot of commercial buildings that have received a recent energy-saving upgrade.
The 179D deduction offers tax savings for every square foot of commercial space retrofitted with energy-efficient technology. This deduction has existed since 2006, but the IRA has granted it permanent status and nearly tripled the funds available, from a previous limit of $1.88 per square foot to a new $5 maximum for buildings completed after January 2023.
To qualify, a building must have reduced its annual energy costs by more than 25% by making energy-efficient improvements. Funds are allocated on a sliding scale, from 25-50%, with the $5 per square foot maximum going to buildings who demonstrate a 50% reduction in energy costs. Where the 179D could previously only be used once, it can now be claimed every three years, contingent on further building upgrades being made.
Who Can Apply for the 179D?
The 179D primarily applies to commercial building owners and the owners of large apartment buildings, but tenants may qualify if they have made the relevant construction expenditures. In the case of tax-exempt entities, such as not-for-profit organizations, public hospitals, schools, churches, and tribal organizations, the deduction can be passed on to the building designer, who may be the engineer, architect, or contractor.
What Kind of Improvements Does the 179D Reward?
The 179D rewards energy efficient improvements in the following categories:
- Building envelope: Insulating or retrofitting windows, doors, roof and walls.
- Interior lighting: Including lamp or fixture replacements, incorporating skylights, or changing to LED.
- HVAC and hot water: Replacing an air conditioner with a more efficient model, installing a geothermal heat pump, or instituting demand controlled ventilation.
What Steps Must Be Taken Before Claiming a 179D Deduction?
A licensed engineer must complete a building assessment using IRS-approved software before 179D tax deductions can be claimed. They will check whether the building meets the required energy-savings threshold according to ASHRAE standards. Successful applications will require a 179D certification document signed by this person.
New Energy Efficient Home Credit (45L)
The 45L offers builders of single and multi-family homes a £2,000 tax credit for meeting certain standards of energy efficiency. This credit expired in 2021, but has been retroactively extended through 2022 by IRA legislation. The 45L will expand considerably in 2023, rising to $2,500 for single or multi-family homes constructed according to selected criteria. A double-strength tax credit of $5,000 will be available for builders of homes certified as ‘Zero Energy Ready’, or proven to be more than 40%-50% more energy efficient than an average new build. The 45L will continue at these new rates until 2033.
Who Can Apply for the 45L?
A person must own an energy-efficient single or multi-family home during construction in order to qualify as eligible for a 45L credit. If a third party contractor is hired to build a home by the person who owns and has basis (pays for improvements) in the property, the homeowner remains the qualified contractor and only party eligible for the 45L.
What Does the 45L Reward?
The 45L takes into account energy-efficient features, especially those that allow heating and cooling energy consumption at significantly lower rates than the national average. Special emphasis is placed on:
- High R-value insulation, roofing, doors, and windows: R-value refers to an insulation material's resistance to conductive heat. The higher the value, the better the insulant.
- HVAC systems: These include heat pumps and energy-efficient air conditioners.
What Steps Must Be Taken Before Claiming a 45L Credit?
In order to claim a 45L tax deduction, a home must be certified as meeting either the requirements of the ENERGY STAR Residential New Construction Program, the Manufactured Homes Program, or must become certified as a DOE Zero Energy Ready Home (ZERH). A qualified certifier from the relevant professional organization (unrelated to the homeowner) must perform computer modeling and other on-site tests on the home before any of these certificates can be awarded.
Energy Efficient Home Improvement Credit (25C)
The 25C offers homeowners or tenants a tax credit for qualified energy-efficient home improvements and energy audits. This credit, like the 45L, has been retroactively renewed for 2022 and is scheduled for massive expansion in 2023. While the original credit compensated for 10% of energy-efficient home upgrades, the 2023 version will cover three times this amount, at 30% of the cost of improvements. The deduction covers both the cost of the materials and the installation or labor involved. While most 25C deductions are capped at $600 per upgrade, or $1,200 per year, the scheme allows for up to $2,000 to be claimed on heat pumps for either indoor space or water.
Who Can Apply for a 25C Deduction?
The 25C is open to both homeowners and tenants who have made energy-saving improvements or conducted an energy-efficiency audit on their home. Improvements made to second homes are not eligible for deductions under this credit.
What Does the 25C Reward?
The 25C covers qualified energy-efficient features purchased for homes. Some of these include:
- Building envelope: Such as doors, windows, walls, roofs, and skylights. Different deduction limits are set for each of these. For instance, a cap of $250 is placed on each exterior door, while interior windows may grant deductions of up to $600.
- Energy property: This refers to property that generates energy through solar or wind power, like solar panels or small wind turbines. Deductions of each of these items are capped at $600.
- HVAC equipment: Such as heat humps, heat pump water heaters, air conditioners, boilers, and biomass stoves. The credit for both kinds of heat pumps is capped at $2000, while all other HVAC equipment is set at $600.
- Energy efficiency audits: These may be used to qualify for other credits, such as the 45L, and are capped at $150.
What Steps Must Be Taken Before Claiming a 25C Credit?
The 25C credit is claimed through tax returns. Unlike the other credits discussed here, no third party examination is required for this credit.
How IAQ Technology Can Assist
Since 179D credits can save contractors and businesses hundreds of thousands in tax, it’s worth taking every step to ensure your building meets the energy-efficiency standards that these credits require. HVAC accounted for 51% of residential energy consumption in US homes in 2015, and 39% of office buildings in 2013, making it the largest energy expenditure in both, and the most valuable area in which to focus on energy saving.
Here are two methods that can dramatically reduce your HVAC costs:
Identify Issues With Your HVAC System Using IAQ Monitors
Indoor air quality (IAQ) monitoring can provide insights into where your HVAC system is inefficient. By identifying issues such as higher concentrations of CO2 or particulate matter, you’ll get an ‘early warning system’ that alerts you when your HVAC system is not operating at full efficiency - and allowing you to intervene with repairs or maintenance.
Keeping your HVAC system in tip-top shape can reduce the amount of energy expanded on ventilation and air conditioning. This can generate direct cost savings and also help you pass the assessments required by the 179D and 45L.
Modern IAQ monitoring technology, including Kaiterra’s Sensedge and Sensedge Mini devices, has made continuous air quality monitoring simpler and more affordable - and the recent tax breaks have made this investment all the more sound.
Building Automation Systems and Demand-Controlled Ventilation
Installing a Building Automation System (BAS) is another way to reduce energy use in preparation for a 179D or 45L evaluation. BAS are centralized systems that allow for the automatic control of HVAC, lighting, electricity and access zones.
Pairing BAS with IAQ monitoring allows for large energy savings to be made, as the sensors automatically reduce ventilation, and the associated energy usage, when it is not needed. This is achieved through a process called demand-controlled ventilation (DCV), where carbon dioxide levels indicate whether a space is in use or not and HVAC use is adjusted accordingly.
Not About the Credits… But They Help
Of course, IAQ technology and the other energy-efficient solutions discussed above are not just ways of achieving tax credits, but of reducing a building’s environmental impact and overall energy costs. That being said, the IRA’s unprecedented spending has made these credits more valuable than ever, and smart business and home owners will pursue them. Both the 179D and 45L can save building owners a fortune in tax, while the 25C allows residents to claim large deductions while revolutionizing their building envelopes and HVAC systems. IAQ monitoring and BAS can provide the key to making the reductions these credits require. You can learn more here:
Interested in improving your workplace experience through healthy building optimizations?
To learn more about how to take advantage of the IRA through IAQ monitoring, schedule a free consultation with a Kaiterra air quality expert below: