Commercial Real Estate? The IRA is for you, too!
Some people may not be paying attention to the Inflation Reduction Act (IRA) thinking it only applies to renewable energy companies. But a hidden gem of this legislation is that it provides tax incentives for others, too - like technology-neutral benefits, personal home opportunities, and yes - even commercial real estate incentives! Here a couple of opportunities you could be considering if you’re involved in commercial real estate, and a case study below to illustrate the possibilities.
Energy Efficient Commercial Building Deductions
o Tax Provision Description: Provides a tax deduction for energy efficiency improvements to commercial buildings, such as improvements to interior lighting; heating, cooling, ventilation, and hot water; and building envelope.
o Period of Availability: Permanent; new rules generally begin in 2023.
o Eligible Recipients: Owners and long-term lessees of commercial buildings. Designers of energy efficient building property (architects, engineers). Tax-exempt owners of commercial properties, pending Treasury guidance on deduction allocation.
o Base Deduction Amount: $0.50-$1 per square foot, depending on increase in efficiency, with deduction over four year periods capped at $1 per square foot. Inflation adjusted. Alternatively, taxpayers can deduct adjusted basis in “qualified retrofit plans” that reduce a building’s energy use intensity by at least 25%.
o Bonus Deduction Amount: 5 times the base amount if the project meets prevailing wage and registered apprenticeship requirements. Initial federal guidance on the labor provisions are available.
Energy Property Investment Tax Credit (ITC)
o If you’re evaluating a possible tenant who is a renewable energy company, you should be aware of the tax credits their investments will depend on, and the timing in case it affects leaser terms or tax credit sharing opportunities.
o Bonus Credit Amount: 5 times the base amount if the project meets prevailing wage and registered apprenticeship requirements. Initial federal guidance on the labor provisions are available.
o This tax credit is transferable (once).
**Planning for these opportunities as early in your lease cycle as possible will help you take advantage of them more efficiently to help your bottom line more, and minimize risk of possible problems with the IRS later. Plus, many of these credits require detailed knowledge of your specific property and tenant’s business, meaning you want a trusted partner providing you this advice.
Case Study:
This quick case study will highlight the opportunity for just one of the above tax credits on just a single possibly illustrative project for commercial landowners.
Building Size: 20,000 sq. ft.
Tax Deduction: $0.5-$1/sq. ft.
Bonus Deduction: 5x
Deduction Available for Energy Efficient Improvements: $50,000-$100,000
To properly take advantage of these types of opportunities, you’ll want the equivalent to an in-house tax attorney providing the business-specific, intimate, and strategic advice and guidance that is needed for. You’ll also want to keep legal costs low compared to traditional ways of meeting your tax law needs. That’s where Drew Willey Law can help.
If you’re interested in exploring these kinds of opportunities further or haven’t shored up your tax planning systems yet, give me a call or send me an email today!