Tax Incentives for Energy Efficient Buildings - 179D and 45L Update

[00:01:36] Hi everyone. Today's podcast guest is George Matar and I'm looking forward to this conversation.
This is totally different than some of the other podcasts that we have done. Instead of talking more about lifestyle and some interesting things about balancing our crazy lives and tax schedules and tax deadlines and being fit and healthy, we're going to dive into some technical stuff. So this is very tax technical. This might tie even better into CPE credits. And we've had so many questions about some of the changes that occurred in the bill that was passed in mid 2022. And what we wanted to do is pull together this podcast to talk about some of those details and really explain what some of the incentives are specifically relating to energy efficient buildings. So that's what today's topic will be. George Matar is my colleague and he and I have worked together now for, I believe it's more than ten years, I don't know, George, 1011, somewhere around that range. And George is actually the head of both of our R&D departments as and our energy efficient incentives department. So he really is our go to technical expert on a lot of these incentives and just an overall phenomenal person. So I'm really excited. George, thank you so much for being here with me.

Speaker2: [00:02:52] Yeah, thank you, Heidi. Appreciate it. And look forward to talking about these technical topics.

Speaker1: [00:02:57] Perfect. Okay. So we're going to dive in in summary to give everybody a little bit of forewarning before we jump in. What specifically we're going to talk about are two incentives that relate to energy efficient buildings. The first one is called the 179 D deduction, and the other one is called the 45 Credit. They're both applicable to different types of properties and projects. And what I want to do is kind of in summary, talk a little bit about what these historically have been, and then we're going to talk more about now what they are going forward in 2023 for future projects, because there have been some really interesting changes. So there's a lot to cover. Again, a lot of technical information. And George, you and I are constantly trying to to interpret what all of these new regulations mean, huh?

Speaker2: [00:03:44] Yeah, absolutely. I mean, the changing tax code, new guidance from the IRS, just trying to figure it all out to best advise our clients.

Speaker1: [00:03:52] Yeah, exactly. And you know, one thing I think some people don't realize because although we have a lot of CPAs that listen to this podcast, we have a lot of real estate investors and clients that we work with who are developers or builders or people that own real estate, and they're making improvements that can qualify for some of these incentives. And so to to go backwards a little bit in regards to how some of these legislative bills get passed, I think it's interesting or important for us to to set the foundation that a lot of times these bills are passed and not everything is black and white. There's a lot of interpretation that needs to happen. And there's also a lot of feedback and guidance because of the lack of clarity that occurs when we get a bill like this passed. George To that point, what are a couple of the really high level before we dig into the deep stuff? What are a couple of the things that we're sitting here saying, wait, you need to help us out here. We need more information. Yeah.

Speaker2: [00:04:46] Mean Absolutely. The Inflation Reduction Act caused a ton of changes to both programs and one of the biggest uncertainties is around these labor provisions. Like how exactly do we document the prevailing wages? What exactly is an apprenticeship? When does construction kind of begin? What is a jobsite, the definitions of laborers and mechanics. It's a lot of questions due to new policies that are being implemented, especially when you consider the bonus benefits that there possibly at play.

Speaker1: [00:05:14] Yeah, exactly. Because now we've got this tiered benefit for both of these that depending on what level you're meeting, determines how much you can claim. And yes, we're looking for clarity on these. And of course, the IRA Bill took an energy efficient incentive or two energy efficient incentives and then added in this whole labor thing, what George is talking about is this prevailing wage requirement for projects that is completely new because these historically have just been about energy efficient buildings, and now it's becoming about how we're paying employees and what our wage rates are. So this is a completely different game, right?

Speaker2: [00:05:51] George Yeah, absolutely. Especially when we start thinking about 179 and how it impacts building owners, but also technical designers working as the kind of design development entity on these, you know, government projects, public entities and what access they might have or how they can best achieve that maximum benefit.

Speaker1: [00:06:10] Yeah, absolutely. Okay. So let's start with 179 first and then we'll talk about 45. If somebody is here specifically for 45, maybe fast forward, you can jump down 15, 20 minutes or something in the podcast and listen to that part. We're going to start with 179 D, the 179 D or I can't even remember the Energy Policy Act of 2005. Right? Wasn't that what it originally was?

Speaker2: [00:06:39] Yeah, exactly.

Speaker1: [00:06:40] Yeah. Epact. I almost drew a blank. It's been so long. So it was originally passed back in 2005. It is the 179 D is the actual tax code section. That's why that's what it's called. And it is a tax deduction for energy efficient commercial buildings. In 2005, this was passed with numerous changes over the years, but it started out as basically a $1.80 per square foot as a tax deduction that you could claim for energy efficient buildings. This could be new construction or renovation either way, and it would apply to either of these projects. There were also sections to that. So $1.80 is for an entire building, but you could also separate that into individual systems. So it was $0.60 per square foot for lighting, $0.60 for mechanical systems and $0.60 per square foot for the building envelope itself. So if we had someone who did a lighting retrofit on a building, they could just claim $0.60 a square foot for the deduction, essentially to help fund a portion of that improvement or those new light fixtures that they installed in these projects. The 179 also had a provision all along that allowed a designer, typically an architect, to claim this deduction if they did the technical design for a publicly funded project. So government entities or local projects, they were actually able to claim this deduction for having really done a social service essentially by creating more efficient buildings. And we've seen that tremendously. We have worked with thousands of architects across the country to claim this deduction to that benefit.

Speaker1: [00:08:16] So it expired at times it would come back. The 179 D gets left on the table often because of this weird gap, I would say, between industries. And this is where ETFs comes into play. We have this tax technical bill that requires engineering to verify energy efficiency. So CPAs, typically they don't know anything about it and they don't have the ability to help a client claim the deduction because of this engineering aspect. On the flip side, you have an architect who's designing an energy efficient building, but this is all about the tax code and they would have to read hundreds of pages of technical tax code to understand what's required in order for a building owner to qualify, which then is not in their wheelhouse. So you have this gap where the architects typically don't necessarily advise or mention that to a client, where they're designing, who they're designing a building for, and the CPAs don't mention it because this is so technical. It's really not something that they understand. That's really where our firm Engineer Tax Services is being able to kind of come in to this middle ground, you know, 20 to 23 years ago to help bring this expertise to fill that gap and also why we do a lot of education. So that's kind of the foundation of 179 D now flipping to the current bill. George, I'll pass it to you and I'll let you now summarize. Okay. What is Ira do now exactly?

Speaker2: [00:09:40] So before we had solely an energy efficiency analysis based on lighting, HVAC and envelope, trying to measure how the building and your proposed design compares to this Ashrae analysis. Now for the Inflation Reduction Act in the IRA and buildings placed in service in 2023 and forward. Now, it's a shift from this kind of systematic analysis to a whole building analysis where now it's no longer. How well did your HVAC perform, your lighting, perform your envelope, perform, Now it's how did your entire building and that design kind of compare to this ashrae baseline on a sliding scale of Big Four $0.60 per system to $1.80 maximum benefit per square foot to now this baseline tax benefit of $0.50 for a 25% energy efficiency over the baseline up to a dollar per square foot for 50% energy savings. And then you kind of bring in these labor provisions and installed where if you can meet prevailing wages, if you can meet this suppression requirement, you get this five X multiplier that then makes this benefit $2.50 per square foot to up to $5 per square foot. And then to kind of add to the complication, there is a nice little exemption where luckily with the guidance coming out and some of the uncertainty around prevailing wage and apprenticeship, we had this nice exemption where if your project was in construction before January 29th, 2023, you then can automatically achieve this five X multiplier to your tax benefit.

Speaker2: [00:11:14] So kind of moving away from, again, that systematic analysis to now a whole building analysis to get this five X multiplier on basically a three times benefit on what the program used to be, but a couple more like asterisks on how we're able to. Get there with the labor provisions and really almost pushing the the analysis from, okay, we all we were looking at new construction retrofits, renovations and really almost pushing everything with this whole building analysis to really kind of incentivize new construction. And we can talk about qualified retrofit path and how renovations can qualify later. But I think as a whole, seeing the really pushing this new construction benefit, especially consider like construction timelines and all the systems analysis in this whole building metric.

Speaker1: [00:11:59] Yeah, absolutely. So we're we're looking at I mean, this is 179 is still applicable to new construction and to renovations, right? So we still have the same metric. It's now a reduced benefit starting at $0.50 a square foot as to as opposed to what we used to have at $1.80 per square foot. It's based more on the percentage of energy efficiency. But now we have A5X times multiplier. If you have the energy efficiency, if you if you've achieved the energy efficiency plus the wage requirements, can you explain a little bit more about what those wage requirements are?

Speaker2: [00:12:39] Yeah, absolutely. So that's kind of the big question right now with the two. The two labor provisions are prevailing wages, which is basically all laborers and mechanics on the job site. Basically everyone doing the manual labor at the job site who's not in a management or executive role need to meet the local prevailing wage, which that's been in government work for a very long time. Using the Davis-Bacon Act, local contractors need to meet the local prevailing wage. And now it's kind of like, how do we document it? How can we ensure it that we're able to meet it? For this 179 guideline? So prevailing wage has been around for a while and there is a great database online kind of breaks it down by building type state, region down to county. So you can see exactly what prevailing wage rates are based on labor and mechanic job title, based on county, based on state to help give some guidance there. And then the big uncertainty is around apprenticeship. So what this is, is depending on when you're building was placed into service, you have to meet a certain percentage of labor hours on the job site are being worked on by a federally recognized apprentice labor. So a the percentage range ranges from about 10% to 15%, depending on when the building was placed in service. But the big uncertainty is what is the definition of a federally recognized apprenticeship program? Is this just kind of like a union apprentice? Is this other potential state programs? And how exactly does that labor ratio kind of break down? So we are hoping for some guidance in the next, say, 3 to 6 months from Treasury on their apprenticeship program. But of the two labor provisions, there's definitely a lot more uncertainty with apprenticeship.

Speaker1: [00:14:27] Yeah, absolutely. Do you remember the website where the apprenticeship program is set up, like.

Speaker2: [00:14:34] The apprenticeship program? I believe there's a Department of Labor website that kind of houses a lot of questions, kind of an FAQ about prevailing wage, about apprenticeship, but it is definitely a work in progress on the apprenticeship side.

Speaker1: [00:14:47] Yeah, Yeah. Well, and I read something about apprenticeship as well as we, as we've been working through this. And one of the interesting aspects is that the apprenticeship programs kind of run by a federal agency. And so these companies, whether it's a contractor or subcontractor, who's going out, let's say it's an electrician and they're required to have a certain percentage of their hours performed by a registered apprentice on a given project, They would go out and they would apply for an apprentice through this government program. And then the government program would let them know who's available in that area and could find them or identify an apprentice in which they could then hire or use for a project. Right. I found it interesting because in my reading what it's saying is that, you know, again, this is how legislation sometimes happens is we pass bills and all of the infrastructure is not quite in place to support those yet, which I think this is exactly the case here. This program really isn't all the way built out. It certainly is not as robust as it needs to be to support the type of projects that we see all over the country. With that said, what I've read is that if you go in and you apply for an apprentice, that you will actually be given some options or you'll be denied if there's nobody available in your particular area, if you are denied as a contract or subcontractor looking to hire an apprentice, you apply for that and they deny you because there are no apprentices available. It essentially gives you a free ticket. To bypass that rule. So exactly.

Speaker2: [00:16:29] That's part of the good faith exemption.

Speaker1: [00:16:32] Yeah, the good faith exemption. Okay. That's the proper term for it.

Speaker2: [00:16:37] As long as you tried, because there's kind of the two checkboxes. Did you meet prevailing wage? Did you meet apprenticeship? And if there are no apprentices, you have that good faith exemption to kind of fall back on.

Speaker1: [00:16:47] Perfect. Okay. Yeah, I'm glad you have that technical term because I couldn't remember what that was. But, you know, it's interesting because I have a lot of clients and developers who are working on projects and they're trying to set these systems up. And this is what we're finding is really the resources aren't quite there. The nice thing is if that's the case, it's not a it's not a fail from the sense that, well, there's no apprentice available. You can't meet the apprenticeship rules, therefore you can't claim this deduction. On the flip side, they're actually going to give you the higher deduction at the five times multiplier rate. If if you don't have apprentices available and you just simply get your denial letter, you can then include that through the paperwork or kind of your documentation. So I think that's important to note.

Speaker2: [00:17:33] And I'll also like on that note, I mean, with 179 D, there's kind of two paths to claim that the deduction, right? If you're a building owner, you can claim on your own building. And if you're a technical designer working on now with the Inflation Reduction Act, public government buildings, now there's tribal organizations, not for profit churches, kind of opened up the the filter on who can be eligible to allocate the benefit to technical designer. So when you get into these labor provisions, I mean, prevailing wage on a government project, maybe you have a little bit more accessibility on that. But as a technical designer working for a public entity or even a nonprofit, how much say so do you have onto how much they're paying their labors and mechanics on the job site? How much say do you have into how they're hiring their apprenticeship, their apprentices and your input there? And even if you can provide that, how do we get that financial documentation to prove that all the labors and mechanics were paid prevailing wage or met their appearance labor hours? Like what control do you have as a technical designer? And that's a lot of uncertainty there to kind of it's not really fair for a tech designer working on a public project where you're pushing this energy efficient design and really creating like an outstanding product to then be penalized because of that lack of uncertainty or lack of guidance for a new program. So a little bit of uncertainty there on hoping Treasury can help clear us up to make sure we're able to maximize the benefit.

Speaker1: [00:18:58] Yeah, absolutely. Yeah. I mean, so coming back to the government allocation or the designer allocation, I talked about that briefly as we started. The designer allocation is still in this bill and they did expand it. So as long as we've had 179, it's been something that could be allocated to the designer of the technical system if it was a publicly funded project essentially, so that entity can't use the deduction, their non taxable entity. So that deduction is then allocated over to this designer. That's been tremendously valuable going forward. We still have at what they did is they expanded it now to allow a designer to take the allocation still on publicly funded projects, but additionally they can also apply it to nonprofit projects they design and they can apply it to tribal projects that they've designed and be able to take an allocation for this deduction to round this out. If you're looking at 100,000 square foot building, what we see the most often, probably the most common projects are schools K through 12 schools. Absolutely. We do tons of these. We're designers are developing our and designing our public schools. If they're qualifying for the base deduction at the full amount, let's say they meet 50% energy savings and they're achieving that highest level of energy efficiency without prevailing wage.

Speaker1: [00:20:20] That is a dollar a square foot, correct? Okay. So that would be essentially a $100,000 tax deduction that that designer would be eligible to claim for having designed this energy efficient K through 12 school. Now, if they can document that the prevailing wage and apprenticeship rules were were met throughout the work and all construction labor on this project that would bump up to the $5 a square foot, which would essentially be giving them a $500,000 deduction. Again, this is the architect or designer for a public K through 12 school. That could be $500,000 deduction. But again, now they have to actually document and prove that apprenticeship there. There were an appropriate number of percentage of hours paid for apprentices and that the prevailing wage minimum was met of all laborers who worked on that project throughout the whole project. So now the question is what are our thoughts on how do we actually track prevailing wage? I have people. Ask me all the time. Well, can I just have him sign something? Can I just, you know, have a page that's, you know, sign? Yes. I paid all my employees prevailing wage. Here's the paper. Take it and go. What are your thoughts on that?

Speaker3: [00:21:36] Yeah, I think.

Speaker2: [00:21:37] Most of the stuff I've been reading has been kind of carrying a detailed ledger of saying, you know, John Smith was a bricklayer. He was paid X dollars per hour. And that type of documentation broken down for all the laborers to basically do a checkbox to say, okay, John Smith met prevailing wage, Jane Doe met prevailing wage and kind of comparing that. And it does become laborious where you have to kind of break that down. But I mean, with construction going on, I think tracking that on a weekly, monthly basis is going to be the most successful compared to, you know, post construction. Hey, did we meet this or not? I mean, considering the amount of dollars on the table to find out that, you know, you missed out on that five X multiplier, that difference between 100,000 and half a million and a tax deduction due to, you know, a handful of people not meeting prevailing wage. I think that's going to be tough to swallow.

Speaker1: [00:22:27] Yeah. Yeah, absolutely. Well, and there's I've had so many conversations I've gotten with with developers as we're talking through how could we do this or how can we set up processes to track this? One of the thoughts that we had talked about was potentially creating a system where, you know, one of the pain points, let's say, not on a public project per se, but just a private project that maybe a developer himself is building. He has his general contractor and a bunch of subs who are working on this project. You know, they're doing all the labor. We've got our plumbers, electricians, framers, all of these people. There's a pain point with asking subs, Hey, I want you to send me a payroll statement and show me how much you paid your employees. You know, there's immediate alarm and kind of a, you know, feeling like, you know, someone's looking over your shoulder saying, oh, okay, you know, you have to prove that you're actually paying your employees enough. And, you know, these developers, one, don't feel comfortable doing that. Secondly, don't think that their subs are going to be willing to provide that information. However, some thoughts are as this becomes more prevalent. And I think we are absolutely looking at at this becoming commonplace. I mean, now they've passed this bill. There's going to be other bills. Prevailing wage is a thing and I don't think it's going anywhere. So anybody in the labor field is going to have to begin to understand how this works. And if they're already working on government projects, typically they have to prove that anyway even when they're working on these projects or they're bidding projects. So from that sense, you know, the thought is that if they're tracking these and then not necessarily asking for payroll statements, but just an affidavit, so to speak, not even of the number of hours worked by certain individuals.

Speaker1: [00:24:13] But if a subcontractor requests payment for a service. Okay, we finished the electrical on this building. Here's our invoice. The developer could potentially say, okay, Mr. Electrician, thank you. We will pay you after you forward the affidavit showing the hourly rate for each of the people that worked on this project. So I don't think it needs to say, you know, John Smith worked 72 hours at $22 an hour. It could just simply say, here are the ten individuals that worked on your project, and here was the hourly wage. And probably it has to have their position because the website, it lists them by position. So the type of job they're doing and it would literally just be a sheet where it's saying, here are the ten people who worked on this project, this is their position and this is what they were paid per hour. Another concept also is to take those wage reports which are readily available. You pull up, pull it up in your area and the type of construction you're working on. You can easily pull those reports, supply those to your subcontractors and let them know that this is essentially what's going to be required for this project and future projects in order to qualify for some of these tax credits or deductions. But George, do you feel like that type of a, you know, an affidavit not necessarily spelling out or having detailed or signed payroll reports, but at least outlining who worked on them and what they're being paid hourly? Is that sufficient to be able to defend a prevailing wage claim?

Speaker3: [00:25:48] I think that would I.

Speaker2: [00:25:49] Mean, I like the way you broke it down with the affidavit saying, you know, this is the job role, this is the prevailing wage. This is kind of how they meet it. I think that checks all the boxes.

Speaker1: [00:25:58] Yeah. So I think it would be a great option, especially at the point that they're requesting payment, because then a general contractor has a little bit of, you know, a little bit of strategy there for saying, okay, yeah, you know, give us this affidavit and then we'll make sure and get this payment processed. I think it can.

Speaker3: [00:26:16] Solve the.

Speaker2: [00:26:17] Technical designer side to where if there's these affidavits are floating around, they don't have like personal information that could help with technical designers work on these projects with allocation. And if. That's floating, that's suffices.

Speaker3: [00:26:28] Yeah.

Speaker1: [00:26:29] Yeah, absolutely. And then that's rolled then into the reports. So, you know, as an engineering firm is what we're doing, we're going in doing the technical energy modeling. We're actually certifying the percentage of energy savings for these projects and would like to be able to roll in the prevailing wage data into our reports to then verify, is this a dollar a square foot or is this $5 a square foot based on which of these areas it's achieving? So that's kind of how we're approaching it and how we're looking at this. Any other changes as it relates to the energy efficiency, specifically back to energy savings? How were we modeling these and what are the differences now going forward that we can expect?

Speaker3: [00:27:09] Yeah.

Speaker2: [00:27:09] I think luckily on the energy modeling side, under the prior, you know, pre Inflation Reduction Act, we're comparing to ASHRAE 90.1, 2007. And fortunately now with the Inflation Reduction Act, we're still comparing it to this ASHRAE 90.1, 2007 baseline that will change as this kind of standard will remain in place through 2026. And then it'll it'll jump to, I think current projections are ASHRAE 90.1 2019. So it is going to be a large jump in the future. But at least right now, with all the kind of Labor provisions and everything else, at least the energy standards are the same. So that new construction and kind of modern day design solutions are still performing very well compared to that 2007 baseline. So really the big change has been under the prior to the kind of three system analysis where we were able to kind of isolate HVAC envelope and lighting can compare systems individually. So now under the IRA, we have that whole building analysis and then this kind of other plan of qualified retrofit path where for renovations, if we're not able to meet the energy savings using the whole building approach, which is challenging, if you're only replacing the lighting, how are you going to analyze the entire building to only isolate the savings of the lighting, which was a successful approach under the pre IRA? So now under the Inflation Reduction Act, we have this qualified retrofit path where we're able to say, okay, instead of comparing your proposed design to an ashtray baseline, let's kind of take your utility bill, an energy use intensity comparison to kind of say how does your building's proposed renovation compared to the existing building's energy use intensity? So you're kind of comparing 12 months of utility data post retrofit to 12 months of utility to pre retrofit and doing that comparison, which can be a little bit more friendly to a lighting retrofit, an HVAC retrofit, something where you're not doing the entire scope of the energy systems.

Speaker1: [00:29:10] Okay, Got it. So in a in a renovation, does it remain an option to do one or the other where we're doing a full building model against ASHRAE and comparing the percentage or identifying the percentage of energy savings? Or we can do the 12 months of energy use ability, I guess, bills and whatnot to identify.

Speaker3: [00:29:30] Yeah, absolutely.

Speaker2: [00:29:31] So there's always that primary certification path of energy modeling that's kind of the go to. And the good thing on the tax side about that is if we are able to qualify through energy modeling, you actually get the tax deduction in the year the building was placed in service. Now, one consideration with the qualified retrofit plan is that, yes, it's a little more friendly to renovations, but there is kind of a tax strategy there in that because you have to wait for 12 months of consecutive utility to post project. Your benefit is then delayed a year. So if a building was placed in service in 2023 and you do a qualified retrofit path, let's say you don't qualify for the energy modeling, we take that alternate, then that tax deduction would then fall into the following tax year, 2024. So a little bit more advantageous. So if you kind of strike out in the primary path, you have that as a backup to kind of claim the following year.

Speaker1: [00:30:23] Nice. Okay. And then the deductions claim 12 months after the install of those improvements rather than right when they're finished. So nice to know that there's two separate paths for qualifying those when we're looking at retrofits versus new construction.

Speaker3: [00:30:37] Yes.

Speaker1: [00:30:38] Any other points on 179 before we shift a little to 45?

Speaker2: [00:30:42] No, just I think you highlight the big one, which is, you know, eligible clients where before the Inflation Reduction Act, it was maybe mainly public entities. So federal, local, state governments. And now it's expanded to not only the government projects, but also any the keyword tax exempt entities.

Speaker1: [00:31:02] Yeah, absolutely. That's one that we really had so many clients asking us about for, what, the last 15 years. I think, you know, can't we do this? We do lots of hospitals or lots of other nonprofits or churches and we want to claim the deduction and it was just never an option. So it's really nice that this was something that was recently added and I think it's a big win for designers as well. So yeah.

Speaker3: [00:31:26] Another point is the 179 D is.

Speaker2: [00:31:28] Primarily for commercial buildings and residential buildings, four storeys and higher. So building owners could always claim it. And then for technical designers, that's where that distinction between public entity pre IRA and tax exempt entities post.

Speaker1: [00:31:42] Ira Yeah, no thanks for the clarification because yeah, we did not specifically define that. But yeah, to, to circle back around to George's point 179 D and 45 L apply to different projects mostly we'll explain in a second. But 179 D is is always been for any commercial project of any type. I mean, it can be retail hotels, it can be strip malls, you know, and again, public projects for designers. But for an individual owner who owns real estate, commercial buildings, this can apply to them and can be claimed for, again, new construction or retrofits. It does apply on multifamily housing as well, but only high rise. So four stories and higher is where you're able to claim that deduction. That's perfect. Segue then into the 45 credit, which the 45 credit historically has been a tax credit versus the deduction we've been talking about is a tax credit for multifamily or single family units that are low rise. So historically, it's always been three stories or lower. So garden style apartments, condos, townhouses, single family homes, planned unit developments. We've seen multiple different types of projects where this credit has applied. Again, this has been in play for many years. It was passed early, I think in 2005, and it was a $2,000 tax credit per unit. So again, use an example. Someone with a 100 unit apartment complex was capturing a $200,000 tax credit, not a deduction. So we really like the 45 L This was always a little bit in limbo because similar to 179 179 D, we would have times when it expired and we were wondering if it would come back and sometimes it would even be delayed and be a retroactive passing when they did get around to it. The nice thing is they did just extend 45 credits now to 2032. So we have the confidence. Look, this is here for the next ten years and they have really expanded it quite a bit. So with that now, I sort of give us the background of the 45 credit. George, why don't you jump in and tell us what's new with it?

Speaker3: [00:33:57] Yeah, absolutely. So as I mentioned.

Speaker2: [00:33:59] We kind of recently got an extension for ten years, which is very exciting because even the last year over 2022, we weren't able to certify anything. The program was expired. So historically, the program has been, as I mentioned, $2,000 per dwelling unit and the credit was obtained in the year each unit was first sold or leased and primarily for three story or less residential projects. So now with the inflation Reduction Act, now we've kind of changed energy models. We've gone from an international energy code to now an Energy Star certification, which opens up that floor number, floor restrictions. So before we had to kind of say, is this a 45 eligible project? Is this a 179 eligible project? And now for 2023 and forward under the IRA, we have this kind of potential of anything. Three stories or less is 45. But for anything, four stories and higher, we can actually claim both 45 and 179 D. So the 45 benefit has now changed as well, where for single family homes the benefit is now increased to $2,500 per $2,500 credit per unit. And then for multifamily homes, it has a similar tiered benefit where for multifamily, the base tax credit is $500 per unit. And then if you're able to perform prevailing wages and meet that labor provision on your multifamily development, then that credit jumps up to $2,500. So that same five X multiplier, if you're able to meet the Labor provisions, there's also a similar construction exemption where if your building was in construction prior to January 29th, 2023, you can automatically entered into that five X multiplier for your model, for your multifamily projects. And then to add to that, there's also another two times multiplier. If we're able to prove that not only is your building Energy Star certified, but you're also able to meet this zero energy ready, which is the Department of Energy's secondary kind of design standard. If you're able to meet that zero energy ready home standard now you get up to a $5,000 tax credit per unit. So a little bit more complicated than what it used to be. But I mean, amazing benefit of $5,000 per unit and.

Speaker3: [00:36:21] Right.

Speaker1: [00:36:21] I know. I mean, on that same example, you know, 100 unit apartment complex we're dealing with apartment complex is. That are 350 units. So even out of 100 units, it's at the top tier. That's $500,000 tax credit. Another huge win for 45 electors is that they made another provision that if this is a project that is also claiming light tech credits or low income housing credits, that the 45 credit does not reduce the basis in the asset.

Speaker3: [00:36:50] Yeah. Which is huge.

Speaker1: [00:36:51] Which is huge because it used to be that if it reduces the basis in an asset, then essentially they're not getting as much in the low income housing credit. Now all of a sudden and really we get excited about this because you start to like tap all this stuff together. We do cost seg. You accelerate the depreciation and you get 45 credits and you get low income housing tax credits among local and other incentives that might be available. The incentives are incredible to build housing projects and it's it's tremendous. But anyway, I digress. It gets exciting.

Speaker3: [00:37:28] When you like especially like.

Speaker2: [00:37:29] Four storey plus when you start like tacking on everything. I mean, the tax planning, you can save a lot of money.

Speaker3: [00:37:36] Yeah.

Speaker1: [00:37:36] Yeah, absolutely. Yeah. Because now so 45 was historically only three stories and lower now there's no height requirement on 45 so you can do a high rise project which then makes it also qualify for the 179. So you're actually able to add both of those incentives to that. So now let's dig a little bit deeper. There are some changes on the wage requirements for this that differ from the the commercial aspect with 170. And first, let's talk a little bit about the $500 per unit credit it needs to meet Energy Star. Now, I know we're having some issues with that. So tell me a little bit about now. I mean, what's going to qualify and what isn't. Where are we running into guess problems?

Speaker2: [00:38:20] We're still facing a lot of challenges with Energy Star. I mean, Energy Star is metric and the certification is you're essentially proving that you're building a 75% better than other buildings on the market. So our design team is still trying to get a grasp of what exactly qualifies, how to best analyze the Energy star code. And I mean, one things that we do at ETS is kind of we do a complimentary qualification to see, hey, is this a good fit for the program just because compared to other energy standards, 45 has been a stricter program. And now with the change to Energy Star mean we're seeing a lot less buildings qualify than we would kind of hope. And one of the big things that we're seeing is on the envelope, this continuous rigid insulation is one of the metrics for this prescriptive path on how to qualify. And buildings without that are really being challenged. And of course, there's other metrics like how the HVAC is, how what type of heating you put in, what's the efficiency on your heat pump, you know, using gas, heating, electric heating, what type of windows you're installing, Do you have a whole House fan or not? The 45 volt definitely gets into the weeds onto the technical specifications and compared to 179, it's a lot more challenging to me. But again, that tax credit benefit compared to a tax deduction kind of makes sense.

Speaker1: [00:39:39] Yeah, absolutely. I mean, the cash value of that to investors or developers who are building or selling these units, it's a pretty significant value. But there's always that that cost to benefit ratio. That's one thing that with a lot of our developers and to George's point is that we pre-qualify a lot of these buildings because first we don't, you know, we don't want to engage someone to do this. We specialize in tax credits and incentives. So if you don't qualify and the building's not going to pass, let's not waste anybody's time. But the secondary aspect of that now is that the pre qualification perspective is probably more valuable than ever because we can be a little bit more proactive now and say because it's harder to meet, you don't want to just assume that building something that's pretty efficient and is meeting the code requirements just to get a building permit and some of these areas that yeah, sure, it'll qualify. Rather let's look at it, let's be proactive and usually we can provide some guidance on things that can be done to ensure that you actually do qualify. And that's then where you're able to do that analysis, to do that comparison, does it make sense now to beef up the insulation and go to this rigid wall insulation or something other than what we had planned based on the total credit value? And would that help fund that or how does that work? So good points on the Energy Star. And it's been interesting. Yes, we've had some difficulties there. So that's just the base credit, $500 per unit. The second tier is the $2,500 per unit, which is where we jump up to this prevailing wage. What are the differences between the the wage restrictions or having to track this as compared to what we just talked about on the 179 side?

Speaker3: [00:41:20] Yeah. And luckily, we have a.

Speaker2: [00:41:22] Little bit of good news there in that it's the same kind of program, the same requirements. It's the same documentation as the 117. And this kind of prevailing wage requirement is actually kind of dotted throughout most of the IRAs programs on the side so we don't have to meet the apprenticeship requirement, which is a nice win. We just have to worry about the prevailing wage. And that's only on multifamily structures, which, as I mentioned, there's kind of two pathways, single family homes, which are single family homes, duplexes, townhomes and that, and then multifamily homes which have that kind of double tiered $500 as a base credit. And then if you meet prevailing wage, $25 uptick.

Speaker1: [00:42:03] Perfect, but no apprenticeships required. So we don't have to do the apprenticeship aspect or have a percentage of that. It's just that we're achieving prevailing wage for all the laborers.

Speaker3: [00:42:13] And something I don't know if we mentioned, but eligibility for vaudeville.

Speaker2: [00:42:16] There's this term called eligible contractor, which is who can actually claim the tax credit, and that's either the owner, the developer, whoever has kind of an investment in the property during its construction, that's who's eligible for the tax credit. And as I mentioned, the tax credit is then obtained in the year each individual unit is first sold or leased.

Speaker1: [00:42:35] Yep, yep. Yeah. Appreciate you bringing that up because yes, that's one thing that's unique as opposed to 179 D or cost segregation. When we're looking at depreciation that triggers when the certificate of occupancy is issued in the 45 L sense. It's interesting because it is based on a unit by unit calculation. So in a lot of these these, let's say, large apartment complexes and they get they get finished up, let's say in October of 2022 and half of the units are leased up and the remaining half get leased up into the following tax year. The tax credit is actually claimed based on the rent rolls and how those individual units are actually leased or rented at those at those times. And that's really when the tax credit applies. And yes, going to.

Speaker3: [00:43:20] See that very frequently with.

Speaker2: [00:43:21] Like phase construction or like you said, A buildings completed in one year. And then, you know, we'll have we'll kind of do the same certification over a three year period just to kind of capture for them as the units come online.

Speaker1: [00:43:32] Yeah. Yeah, absolutely. Yeah, we're seeing that a lot. It's interesting. Okay, Now the fun part, $5,000 per unit. Everyone's like, what do we need to do to get 5000 per unit? And this is the question. Everyone's like, Well, what does net zero ready even mean?

Speaker3: [00:43:50] Yeah. And that's kind.

Speaker2: [00:43:53] Of one of the definitions that I'd like to know more about. Now, I do know the Department of Energy has their own program, their own registration on how to exactly meet it. But I think to put it in layman's terms, essentially zero energy ready. Is that taking your building design to the brink? Where if.

Speaker3: [00:44:10] All the energy design.

Speaker2: [00:44:11] Kind of worked together in harmony, and the only thing you need to do was kind of install solar PV panels. Then you'd be a net zero project. And that's kind of the the.

Speaker3: [00:44:24] In the my definition.

Speaker2: [00:44:25] Of what net zero energy ready is.

Speaker1: [00:44:28] So do we mean does that mean that they've put in the conduits they've put in all of the infrastructure so that that would just be a very like you would literally just have to buy the panels and plug them in. Is that would that make a project?

Speaker3: [00:44:45] From my understanding, it's you've kind of taken the design.

Speaker2: [00:44:48] To the highest level of energy efficiency that you possibly can so that all you need to do is then install kind of all the equipment and field work of a solar PV panel. And then that would kind of get you across the threshold.

Speaker1: [00:45:01] Okay. But it doesn't actually mean that the project has to be functioning as a net zero project at that point. So it doesn't have to have all the solar panels installed and all the things that have it operating as net zero.

Speaker3: [00:45:14] No, that's not my understanding of how it would work. Yeah. So the Department of.

Speaker2: [00:45:19] Energy has like a little bit better rundown of how the registration and how the program works, which I'm trying to get a little better grasp of that myself.

Speaker1: [00:45:28] Yeah, yeah, yeah. So for those of you listening again, I kind of started this podcast explaining the fact that this is really what happens a lot of times with these tax bills is they'll pass these things, but we don't always have all the infrastructure in place to support them. And that's kind of what this situation is here. The 190 and 45 credits are can be dramatic. They can be really, really big incentives for building owners, investors, developers, designers of public projects, you know, nonprofits and things like that. Yes, there's a technical aspect to it. Yes. They require third party engineering and certification and verification for those to be able to be claimed. People ask all the time, someone once said to me a few times, actually, well, you know, I looked at into it and the cost of having it certified was more than the tax benefit, which, you know, makes zero sense because we wouldn't be in business if that was the case. The cost, when you really look at the value of the credits, I really think the cost pale in comparison. I mean, it is a tremendous value and the costs are pretty reasonable from the sense of doing the certifications and the energy modeling. So qualifying projects have a tremendous tax value, assuming that the investment groups or the the owners can actually use those and have income tax that they can offset with those, That's always key and something that we like to discuss with our clients and our CPAs as well. But we're certainly learning this as we go. And it's this is one of those things that over the years is constantly evolving as tax code changes and as we're understanding additional regulations as the Treasury provides those. A George, before we close up, have you heard any feedback or any updates on any pending, um, guidance from the Treasury?

Speaker3: [00:47:23] Yeah, the IRS does.

Speaker2: [00:47:24] Put out kind of like a roadmap of what their guidance plans are for the next like six months to a year. So I do know they're still in their first kind of like Sprint. So we are hoping to have more prevailing wage and apprenticeship guidance in the next, say, like 3 to 4 months. And then after that, we'll kind of see what the next roadmap looks like.

Speaker1: [00:47:41] Perfect. Good. So we're kind of early in 2023, so we would expect that sometime late summer, early fall of 2023, we should have some additional guidance and have more information at that point. George And I'll do another podcast.

Speaker3: [00:47:56] Absolutely.

Speaker1: [00:47:57] We'll talk more about the details and all this good stuff, but we can certainly add some of the resources in the notes of this podcast as well. The website, as we had mentioned, is tremendous to pull prevailing wage. I've pulled in a number of areas for some of our developers. Some places are harder than others. I was shocked at the numbers in California and Hawaii because they're very high. But I pulled some for projects in Idaho and they were very, very low.

Speaker3: [00:48:23] Yeah, some of them are close to like.

Speaker2: [00:48:25] Minimum wage, so it just depends on where you.

Speaker3: [00:48:27] Are.

Speaker1: [00:48:27] Yeah, that's exactly right. Yeah, it's interesting. But we would love to be a resource if anyone here has additional questions, we hope this podcast is helpful. We've had so many questions from our clients and our connections. We just wanted to do a more technical review so that you could listen through this and kind of wrap your head around it a little bit. Again, we'll share some resources in the show notes, But George, thank you so much for your expertise and for joining me today. I always appreciate it. You're an amazing colleague and I'm just appreciative. So thanks so much.

Speaker3: [00:48:58] Yeah, thank you, Heidi. It's been great working with you and happy to be here. This has been fun.

Speaker1: [00:49:02] Perfect. All right. Thanks, everyone. Have a wonderful day.

Creators and Guests

Heidi Henderson
Heidi Henderson
I am a Tax Consultant and Real Estate Investor, and podcast host of Healthy, Wealthy & Wise. I advise clients on the application of Tax Efficiencies relating to their investments both directly and indirectly. My education is in Accounting but my entrepreneurial spirit has led me through many business ventures. But I love finding money for people who didn't know it was there! Cost Segregation, 179D deduction, 45L credits, R&D tax credits, Historical Tax Credits, Conservation Easements, Opportunity Zones, Alternative Investments, and Captive Insurance are a few tools we can help you with. As the Executive Vice President and Board Member of Engineered Tax Services I help plan for growth and operational improvements internally, while working externally with investment minded individuals to optimize their investment. I also teach over 30+ Continuing Education courses annually to CPA's, Design Build Professionals and Real Estate Professionals across the U.S. If synergies are apparent, please send me a connection request and let's see how we can work together.
George Matar
George Matar
Director at Engineered Tax Services
Tax Incentives for Energy Efficient Buildings  - 179D and 45L Update
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