Braiding Together Tax Credits in the Inflation Reduction Act
By Ravi Malhotra
3 min read
One of the Inflation Reduction Act’s (IRA) most significant budget items is the money for tax credits, which could ultimately be worth over $500 billion. Key credits for multifamily affordable housing include:
1. New Energy Efficient Homes Credit (45L);
2. Solar and Energy Storage Investment Tax Credit (ITC);
3. Alternative Fuel Vehicle Refueling Property Credit (30C); and
4. Energy Efficient Commercial Buildings Deduction (179D).
IRA significantly increased the credit and deduction amounts that can be secured for qualifying projects, only if those projects meet the Davis-Bacon Act prevailing wages and apprenticeship requirements. Multifamily housing can braid these benefits with Low Income Housing Tax Credits and other IRA incentives to achieve very-high-performing properties that reduce operations and maintenance costs; improve net operating income; and increase health, comfort, safety and affordability for low-income tenants.
Under the IRA, 45L credit has been revived, increased and extended for ten years. The credit applies to both new construction and deep retrofits, but the requirements are a hurdle for retrofits so these should be the focus of new construction projects. The base 45L credit is $500/unit for Energy Star and $1,000/unit for the Department of Energy’s zero-energy ready (ZER). This credit is not eligible for direct pay or transferability, but it can be stacked with LIHTC without a basis reduction. There is no application process for 45L credits; it is an “As of Right” credit, provided the housing qualifies.
Solar, storage and electric vehicle (EV) charger tax credits have been thoroughly discussed in previous Tax Credit Advisor articles (see additional resources). As a refresher: IRA increased the base ITC to 30 percent and extended it until 2032. Solar and Storage ITC is eligible for direct pay (cash paid by the Internal Revenue Service) and transferability (the market, which is developing rapidly and currently stands at 92 cents to the dollar). Most, if not all, LIHTC syndicators will take the ITC along with LIHTC. Multifamily affordable housing properties can receive a 20 percent bonus ITC if they share over 50 percent of the benefits with their low-income tenants. Guidance on how exactly this sharing of benefits works is still a work in progress with the IRS. Regardless of whether a multifamily project wishes to share the 20 percent bonus ITC, the base 30 percent ITC, when combined with LIHTC and the ability to reduce utility allowance with all the IRA incentives, provides a developer with a lot more benefits than the cost of the green installs. The 30C tax credit is now limited to low-income and rural areas, and it covers bi-directional charging equipment.
The 179D deduction is permanently available and can be tapped for energy efficiency improvements in existing multifamily properties. The base deduction is up to $1/square foot, depending on increased efficiency. You can deduct adjusted basis in “qualified retrofit plans” that reduce energy use intensity by at least 25 percent. This deduction is not eligible for direct pay or transferability, but it can be braided with LIHTC and other IRA incentives.
Unlike 45L and ITC, the LIHTC eligible basis must be reduced by the amount of the 179D deduction. Lastly, 179D is only applicable to buildings four-plus stories above grade.
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