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Green Building Tax Breaks Primed for a Big Boost from Uncle Sam

This article is the last in a four-part series about how commercial buildings find ways to finance sustainability projects through ‘green lending’ and other innovative green finance techniques. The first article focused on ‘green banks’ and how they can help property owners finance clean energy projects with high upfront costs. The second part covered green bond offerings, which are becoming an increasing share of U.S. real estate investment trust’s debt issuance. The third part looks at green loans, whose proceeds must apply to sustainable purposes. This fourth and final part covers green tax incentives, which some say have been too weak, inconsistent, and outdated for years, but could soon get a significant boost from Congress and the Biden administration.

Federal, local, and state tax credits and incentives are often overlooked in the race to make commercial buildings greener and more energy-efficient. There are hundreds of green building tax benefits available today and, while property owners may be aware of them, they might not understand the full landscape. These green tax incentives can make energy upgrades much more affordable, but not everyone in the building industry thinks they go far enough. Just ask the U.S. Green Building Council (USGBC). In a recent article on its website, USGBC tells it like it is, saying, “It’s no secret in the building community that federal tax incentives for energy-efficient homes and buildings have been weak, inconsistent and outdated for quite some time. So much, so that many had given up on them.” While this has been the case for a while, a push by Congress and the Biden administration could mean green building tax breaks could get much better soon.

Biden’s Build Back Better agenda aims to allocate $320 billion for clean energy tax credits and incentives. The money would go to all sorts of tax breaks that property owners could use, such as a boost to solar energy incentives and electric vehicle charging. But the leading candidates for major updates are for residential homes and commercial buildings: the Section 179D incentive for commercial buildings, the Section 45L credit for new home construction, and the Section 25C incentive for energy improvements for existing homes. The USGBC says these three tax breaks all currently have low incentive levels and outdated energy performance criteria, which is one reason why building professionals don’t get too hyped about them. These three tax breaks are also constantly clouded with uncertainty because of looming expiration dates. Usually, the tax breaks get reinstated, but that’s after confusion among property owners about whether they’re still active.

Given the dysfunction of Congress, there’s lots of anxiety among green building advocates on whether or not the best of the clean energy tax breaks will pass. Still, those in the building industry observing Washington, D.C., believe by 2022, something will pass that’ll be a marked improvement upon green building federal tax incentives as they stand. The Section 179D incentive for commercial buildings was made permanent by Congress last year, and it should allow for better planning for builders, architects, and engineers. Under a proposal by Sen. Ron Wyden (D-OR), Section 179D’s deduction more than doubled on the high end. This is all welcome news for property owners, but remember to take advantage of the incentives. Especially on the local level, the timing of development decisions doesn’t always mesh well with government timelines. Developers make quick decisions, while the governments move, of course, very slowly. IRS requirements for eligibility are also often complex, so it’s in property owners’ best interests to work with tax professionals who specialize in renewable energy.

Upgrading building systems to be more energy efficient isn’t necessarily cheap, so tax breaks and incentives can be another tool in the toolbox. Any building portfolio with long-term growth goals has to think about getting cleaner and greener sooner rather than later. For commercial buildings to meet the Paris Climate Agreement commitments by 2030, the average building’s energy usage must be slashed by 30 percent lower than current levels. Energy efficiency tax breaks at the federal level have been weak and inconsistent for too long, but that could change soon. Property owners should keep an eye on the negotiations in Washington, D.C., and be prepared to team up with tax professionals so they can capitalize on green tax incentives in 2022, when they may be much better.

From HVAC upgrades to EV charging

The 179D energy efficiency tax deduction is probably the most well-known green tax break for commercial real estate. The deduction applies to expenses for making energy upgrades such as efficient indoor lighting, HVAC upgrades, or improvements to building envelopes. Currently, property owners can get a deduction of up to $1.80 per square foot for building floor areas with the new systems installed to prove energy savings of at least 50 percent. To get the deduction, you must show certification of energy savings, so it’s best to get that from a qualified engineer ahead of time. If you don’t meet the 50 percent energy savings mark, you can still get a partial deduction of $0.60 per square foot if you show more than 16 percent energy reduction certification.

As we mentioned, Section 179D was made a permanent part of the U.S. tax code in 2021, along with other changes. The legislation that created the tax break permanent also updated the baseline standards to encourage building owners to enhance energy efficiency. The tax incentive will use the most recent Standard 90.1 published by ASHRAE as the benchmark to test energy efficiency. Sen. Ron Wyden, chairman of the Senate Finance Committee, also introduced legislation that would boost 179D’s deduction to a new sliding scale system with deductions from $2.50 to $5 per square foot for new buildings based on how well they perform against the ASHRAE standard. For existing buildings, the proposal stipulates that buildings demonstrating a significant improvement over their before-construction energy consumption using Energy Star’s Portfolio Manager would be eligible for similar incentives. Generally, tax deductions like this aren’t as attractive as tax credits, but making the most of the deductions is an excellent way for building owners to reduce overall business taxes.

The Biden administration also proposed boosting tax credits for electric vehicle (EV) charging stations. The proposal would allow property owners to claim the credit on a per-device basis. It also ups the credit for commercial charging stations installed from $30,000 per location to $200,000 per individual device. Biden’s proposal would extend the EV charging credits for another five years until December 31, 2026. Like many of Biden’s proposals, property owners would have the option of taking a cash payment instead of a general business credit. Tax credits like this are often underappreciated because not many fully understand them. A tax credit is a dollar-for-dollar reduction in business tax bills because the credit is applied against gross income. So, if a property owner spends $30,000 on an energy efficiency project, their business taxes are likewise reduced by $30,000.

The catch with the EV charging tax credit, and others in Biden’s proposal, is the credits are paired with labor standards. The taxpayer or property owner must ensure that any laborers or mechanics of an energy efficiency project are paid prevailing wages during construction and, in some cases, even afterward for alteration and repair of the project after it’s in service. Using EV charging or other new energy tax breaks, property owners can also earn additional incentives by meeting ‘domestic content requirements.’ These requirements say the property owner must certify that any steel, iron, or manufactured product part of the energy upgrade was produced in the United States.

Do they go far enough?

Other tax credits part of Biden’s proposal could be attractive for property owners. Biden’s proposal would extend investment tax credits for solar and geothermal electric energy, geothermal heat pumps, water energy recovery, and combined heat and power. The investment tax credits would also include a standalone credit for energy storage tech that has a capacity of at least five kilowatt-hours. Climate change advocates say these enhanced tax benefits will increase property owners’ financial motivation for more sustainable buildings.

But even if industry players like the USGBC seem hopeful about Biden’s green building tax proposals, others think more could be done. Writing in GreenBiz, Heather Clark, Manager of Carbon-Free Buildings at RMI (a research nonprofit dedicated to sustainability), said, “When it comes to buildings, the current provisions in the tax code and modifications being discussed by Congress simply aren’t in alignment with Biden’s ambitions and the shared intent of many members of Congress to address the climate crisis.” Clark and her colleagues note the tax incentives do nothing to push for deep carbon savings in buildings. Existing energy efficiency tax credits often can’t be used in federally supported low-income housing or by low-income households.

Clark says the Section 179D tax breaks should be much more robust, proposing a $15 per square foot credit for buildings that show energy savings of 50 percent. She suggests the credit should increase by 50 cents per square foot up to a maximum of $20 per square foot for each energy-saving percentage point reduction. She also calls for a 45X Clean Heating and Cooling Credit, a 30 percent investment tax credit for clean heating and cooling tech that would replace existing fossil fuel-heavy combustion equipment in many commercial and multifamily buildings. If America wants to really achieve its goal of decarbonizing old building stock, Clark argues these aggressive tax breaks and incentives would help get the job done.

If enacted, new tax incentives and tax credit proposals by Congress and the Biden administration could have broad economic impacts and make a sizable dent in the effort to make our buildings more energy efficient. The proposals could update and enhance tax breaks for commercial building energy efficiency that industry stalwarts like the USGBC say have been weak and outdated for too long. If you’ve been prone to skip over these tax credits in the past, you may want to reconsider. Work with your tax consultant to research and identify all green building tax breaks you’re eligible for, and remember there could be literally hundreds depending on the state, local, and federal incentives out there. Weigh the impact of each incentive and keep a close eye on the negotiations in the nation’s capital. Any building portfolio with long-term growth goals needs to think about reducing energy, so you might as well get a break from Uncle Sam while you’re doing so.

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