What you need to know about Inflation Reduction Act / by Admin

The Inflation Reduction Act was signed in August 2022 by President Biden.

Though the "Inflation Reduction Act" is no longer news. It is still not too late to dive deeper into this legislation and see how it might impact the property we currently reside in.

What does the IRA say about tax benefits for commercial buildings?

In the legislative text section 13303. "Energy Efficient Commercial Buildings Deduction" expands the section 179D tax deduction for commercial buildings. This bill gives commercial buildings several incentives to operate their building sustainably.

Who will qualify for this deduction?

Any commercial building that achieves better than 25% energy performance would qualify to benefit from this bill. These commercial buildings include, but are not limited to, retrofit commercial property or property plans to become certified.

How long could this tax cover?

The aggregate deductible amount concerning the building for the three taxable years immediately preceding the taxable year. This deduction allows the property owner for any taxable year during the 4-taxable-year period ending with the qualified taxable year.

How much would this deduction be?

This deduction would increase from the current $1.8 per square foot to a sliding scale of $2.5 to $5.0 per square foot.

What does a “commercial building” mean?

Commercial building sounds like a simple term, but it is not just office buildings. When talking about energy efficiency, it refers to the term defined in the International Energy Conservation Code (IECC). According to IECC, all buildings EXCEPT the following are considered "commercial buildings."

  • single family

  • Duplex family house

  • Townhouses

  • The buildings of use groups R2, R3, and R4, which have less than three stories.

So, what does "commercial building" in this bill include? Here are a few examples.

  • If you live in an apartment building that is more than three stories, then YES! your building is qualified for this bill.

  • If your hotel, motel, or vacation time-share property is more than three stories, your building qualifies for this bill.

  • If your dormitory, monastery, group home, or assisted-living facility has more than three stories, your facility again qualifies for this bill.

( C202 of IECC states: “For this code, Residential building includes detached one- and two-family dwellings and multiple single-family dwellings (townhouses) as well as Group R-2, R-3 and R-4 buildings three stories or less above grade plane.")

What does achieving better than 25% energy performance mean?

That means the building with an energy efficiency system consumes 25% less energy than a building without it.  

How do you know if your building perform 25% less energy if your building operates sustainably?

When talking about energy efficiency, the market uses ASHRAE 90.1, "Energy Standard for Buildings Except Row-Rise Residential Buildings," as the industry standard. Based on its language, there are three paths to reach the energy performance.

  1. The Prescriptive method: Follow the assembly requirements from sections 5 to 10.

  2. The Energy Cost Budget Method: Follow section 11 and use a simulation program to estimate a building's annual energy cost.

  3. The Performance Rating method: Follow Appendix G and use a simulation program to estimate the building's annual energy cost compared to the baseline building performance.

Thus, only the third method, the "performance rating method," shows how much the building performed better than the baseline building. This method uses the following formula (see ASHRAE 90.1-G1.2.2):

Percentage of Saving = 1- Performance Cost Index/Performance Cost Index Target

Performance Cost Index = Proposed Building Performance/Baseline Building Performance

(The “baseline building” here refers to the building designed to meet the minimum code requirement.)

What’s next?

If your building were already in service during 2023-2026, then your building performance should refer to ASHRAE 90.1-2016's standard. If your building will be in service after 2027, then your building should use ASHRAE 90.1-2016 for the performance calculation.