Decarbonization is a hot topic for property professionals in 2023—and depending on the building, it can also be an expensive proposition. Technologies like rooftop solar, energy storage and combined heat and power can be a significant investment.
However, funding from 2022’s Inflation Reduction Act (IRA) is intended to make those technologies more accessible by giving organizations tax credits for investing in them.
Trevor Joelson, energy services account executive for Trane, broke down the top two pathways to IRA funding in a Monday afternoon session at the 2023 BOMA International Conference & Expo.
Inflation Reduction Act Basics
President Joe Biden signed the Inflation Reduction Act into law on Aug. 16, 2022. This $430 billion tax stimulus package contained $369 billion specifically earmarked for energy resilience and climate change, Joelson explained.
“What makes it really interesting and compelling is that it was infusing money into already existing programs,” Joelson noted. “It was programs that we were familiar with. We understand some of the nuances of how you file for these benefits. It was just more money that was coming in.”
Those existing programs include two that are key for commercial property owners and managers: clean energy and storage via the Investment Tax Credit (ITC), and energy efficiency and electrification via 179D, commonly referred to as the commercial buildings energy efficiency tax deduction.
The Investment Tax Credit is a “lucrative tax incentive enabling carbon reduction technologies that typically fall outside standard operational need,” such as photovoltaic panels, explained Joelson. 179D includes improvements for HVAC, the building envelope and lighting—“all the things we need to build and operate a building,” he said.
The Investment Tax Credit
Both the Investment Tax Credit and 179D have been around for a while, Joelson noted. One of the reasons renewable energy (particularly solar) expanded so quickly across the U.S. is because the ITC was available.
The Inflation Reduction Act raised the base level of the tax incentive available for ITC from 24% to 30%. It also introduced new technologies to the mix. Previously, companies could only get ITC funding for a small set of technologies. The Inflation Reduction Act expanded that to include energy storage and other generation technologies.
Another update in the Inflation Reduction Act includes so-called “booster credits” that increase the amount of ITC funding a project can receive. There are two ways to get more than a 30% credit. One is being located in a part of the country referred to as an Energy Community—in other words, a specific type of community that will be hard-hit by the clean energy transition, such as communities that will be impacted by the closure of coal mines or coal-fired power plants, or the losses of other jobs related to the extraction, processing, transport or storage of coal, oil or natural gas. The other booster credit is a 10% bonus for buying American-made products.
The Section 179D tax deduction was enacted in 2005, but the Inflation Reduction Act beefed it up substantially, Joelson said.
“Historically, the way 179D was set up is that it broke down HVAC, the building envelope and lighting, and each could get up to 60 cents per square foot of a tax deduction if you overdrove on energy efficiency,” Joelson explained. “What the Inflation Reduction Act did was this: It took the three of those and lumped them together, so now you’re not looking at the system, you’re looking at the building. If you meet the energy efficiency expectations of those buildings, you’re now going to get $2.50 rather than $1.88, which was the inflation-adjusted value of the old one.”
Just like with the Investment Tax Credit, 179D also has a booster category, Joelson said. If you’re able to achieve a building that’s 50% more efficient than the ASHRAE 90.1 standard, you can deduct up to $5 per square foot. The country is currently tied to the 2016 version of ASHRAE 90.1, which is less efficient than the 2019 version that’s set to take effect in 2025. You can improve the odds that you’ll receive maximum funding if your project is tied to the 2016 version of 90.1 rather than the 2019 version.
179D also includes two pathways to achieve that baseline rather than just one. “Historically, you had to have a PE produce an energy model. There were some approved tools they could use. Then they had to stamp it and say, ‘Yes, this lighting system is 27% below the ASHRAE standards and I approve this tax deduction,’” Joelson said. “That’s still an option that’s available. It’s the only option for new construction.”
Existing buildings have a different pathway—EUI performance. “If you become more efficient through those systems, and you can prove in a 12-month period that your bill drops by 25-50%, you have access to this,” Joelson said. However, that can be risky; if you invest in new technologies and your performance doesn’t improve as much as you anticipated, you may not get as much money back as you thought you were going to get.
“This is not as lucrative as the Investment Tax Credit,” Joelson said. “However, it is more core to the business and what you’re doing every single day at your buildings and in your portfolio. This is the meat and potatoes of your operations.”
How can you take advantage of these funding sources? Team up with your accounting team, tax advisors, procurement departments and facilities professionals. “It’s going to take a village,” Joelson said. “If you’re on the building owner-operator side, you’re going to have to get uncomfortable and meet some people in your organization who you haven’t met before, and be in the room or the virtual room for the first time.”