In today’s competitive market, maximizing cash flow and reducing tax burdens are critical priorities for construction and real estate professionals. Tax credits and incentives are designed to provide significant financial benefits and should be leveraged where possible to ensure you are not leaving money on the table. Here we explore key opportunities available to property owners, developers, and other stakeholders, including cost segregation, section 179D deductions, section 45L credits, and various additional incentives enacted as part of the Inflation Reduction Act (IRA).
Cost Segregation: Accelerate Depreciation, Boost Cash Flow
Cost segregation is a powerful tax strategy that allows companies to accelerate depreciation and defer taxes. If you’ve constructed, purchased, expanded, or remodeled a commercial or industrial property, this method could substantially enhance your bottom line.
- How It Works: A cost segregation study dissects the construction cost or purchase price of a property, identifying components that can be depreciated over shorter timeframes (5, 7, or 15 years) instead of the standard 27½ or 39 years. For example, electrical outlets dedicated to specific equipment like appliances or computers qualify for faster depreciation.
- Potential Savings: On average, 20% to 40% of a building’s components fall into these faster-depreciating categories.
- Timing: Ideally, cost segregation is conducted during the year of construction, purchase, or remodeling. Early planning, even before a building’s infrastructure is set, can optimize the tax benefits by incorporating tailored strategies.
Section 179D Deduction: Energy Efficient Commercial Buildings
The Section 179D energy-efficient commercial buildings deduction has been significantly expanded under the Inflation Reduction Act, making it more attractive than ever for building owners and designers.
- Benefits for Building Owners: For buildings placed in service in 2023, the deduction is up to $5.36 per square foot, increasing to $5.65 per square foot in 2024. Qualifying improvements include upgrades to HVAC systems, interior lighting, and building envelopes.
- Opportunities for Designers: Architects, engineers, and other design professionals can claim this benefit for energy-efficient designs in buildings owned by tax-exempt or government entities.
- Eligible Projects: Both new constructions and renovations qualify, offering broad applicability for diverse projects.
Section 45L Credit: Energy-Efficient Homes
Multifamily developers and homebuilders can benefit from the Section 45L tax credit, which rewards the construction of energy-efficient residential units.
- Expanded Scope: The Inflation Reduction Act extended eligibility to all building sizes, making it possible for large developments to qualify. For example, a 100-unit project could yield up to $500,000 in tax credits.
- Certification Requirements: Eligible developers must work with a qualified third-party verifier to obtain pre-construction planning and milestone inspections, ensuring compliance with the energy efficiency criteria outlined in the Internal Revenue Code.
- Credit Amounts: The credit is worth up to $5,000 per unit, depending on factors such as energy efficiency levels and building design.
Inflation Reduction Act (IRA) Credits: Various Incentives for Clean Energy Investments
The IRA introduced robust incentives for renewable energy and sustainable infrastructure, with potential credits ranging from 30% to 100% based on location-specific bonuses (e.g., low-income areas, rural communities, or brownfields).
- Eligible Projects:
- Rooftop solar installations.
- Battery storage systems, either for solar or for grid energy optimization.
- Electric vehicle charging infrastructure.
- Added Benefits: Some states and local utilities also offer supplementary grants, making these projects even more cost-effective.
Importantly, with President-elect Trump and a Republican-controlled Congress taking office soon, the future of many tax credits and incentives may face uncertainty. As policymakers evaluate ways to fund new initiatives—such as extending Tax Cuts and Jobs Act provisions—there is a possibility that some of these valuable incentives could be scaled back or eliminated. Acting now allows you to lock in the benefits under current rules and maximize your savings before potential legislative changes take effect. Don’t wait—planning ahead can ensure your projects reap the rewards while these opportunities remain available.
Navigating the complexities of these tax credits and incentives requires expertise and foresight. Our firm provides a turnkey solution to clients exploring IRA credits. We evaluate costs, handle all aspects of the process – from design to application to compliance reporting – and work to ensure our clients know their potential credits before making any significant investments. Whether you’re planning a major development, upgrading existing properties, or exploring renewable energy options, we’re here to guide you every step of the way!
If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
