Two provisions to the federal tax code to incentivize more energy-efficient buildings have been around for many years, yet Congress may soon give them sharper teeth in the fight against climate change. Such measures are vital given the built environment’s substantial impact on the environment —accounting for about 39% of global carbon emissions.
Both 45L and 179D are geared to encourage the construction and renovation of energy-efficient buildings through steps that are an integral part of the pathway to carbon neutrality. 45L is a residential energy efficiency credit that generally provides a $2,000 per qualifying housing unit credit to residential developers. To qualify, projects must meet specific requirements, including reducing HVAC energy consumption by 50% and implementing building envelope efficiency measures.
“45L is a hidden gem in the tax code, and we find a lot of large developers that don't take advantage of it,” said CliftonLarsonAllen Tax Principal Michael De Prima. “It's surprising, but it's never been a highly publicized credit. So we routinely come across substantially sized developers that have never claimed the credit.”
Although 45L has been in existence since the mid-2000s, it hasn’t yet become a permanent fixture of the tax code, though De Prima expects Congress to extend it this year. According to Novogradac, 45L could be extended by five years with the credit increased to $2,500 under the GREEN Act.
Conversely, 179D is a permanent fixture of the federal tax code, though it too is on the docket for tweaking. The law allows a tax deduction for qualifying energy-efficient commercial buildings. A tax deduction of $1.80 per square foot is granted for new or existing buildings based on energy efficiency measures made to three areas: interior lighting, building envelope, and HVAC and hot water systems. Each of the three categories can earn up to $0.60 per square foot for improvements.
“The interesting aspect of this one is there's a carve-out in the rules that says the designers of energy-efficient buildings for governmental entities can actually have this deduction allocated to them,” said De Prima. “This is really unique.”
While developers, builders or owners are usually the beneficiaries of energy efficient tax credits, 179D contains a provision that enables those responsible for the building’s design to earn the benefit. Additionally, building tenants may be eligible if they make construction expenditures. This encourages design teams working on government-owned projects and commercial building tenants making space upgrades to aim for more energy-efficient projects.
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Changes could also be afoot for 179D. According to Novogradac, the rule currently states that only buildings with four stories or greater qualify for the credit; however, the Clean Energy for America Act could allow for buildings with less than four stories to qualify as long as the 45L credit hasn’t already been garnered.
Although these changes may seem small, they could have far-reaching effects in the fight against climate change, given that the built environment often gets less focus regarding mitigation efforts yet plays a significant role in climate change. In addition, producing more energy-efficient buildings is an all-around win for the real estate industry, as the changes would result in energy bill savings, tax credits and help stem the high toll climate change is having on the built environment.
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