The Inflation Reduction Act: An Overview of Clean Energy Provisions and Their Impact on Affordable Housing
The Inflation Reduction Act (IRA) has many implications for affordable housing, the low-income housing tax credit (LIHTC) and renewable energy communities. The IRA provides a historic investment in clean energy and contains a variety of tax incentives, loans and grants to improve energy efficiency and climate resiliency. However, despite the best efforts of affordable housing advocates, the primary LIHTC unit financing provisions and affordable housing and community development spending provisions contained in the Build Back Better Act, previous versions of the reconciliation bill, among other provisions, were removed.
Though focused on clean energy and climate change, the IRA still has implications for the housing and community development sectors, as there are a number of provisions that can incentivize the use of renewable energy and energy efficiency measures in residential and commercial real estate, some of which are targeted to developments in low-income communities.
According to the National Housing Trust, the IRA authorized bonus for renewable energy investment tax credits (ITCs) for low-income communities and affordable housing is estimated to provide $10 billion through at least 2032. For low-income communities, the IRA includes more than $25 billion of direct spending that can be used for affordable housing in the form of several U.S. Department of Housing and Urban Development (HUD), U.S. Environmental Protection Agency (EPA) and U.S. Department of Energy programs (DOE) programs. Additionally, the importance of clean energy in the buildings sector has become urgent as the U.S. building sector is not expected to reach net-zero emissions by 2050. Twenty-nine percent of total U.S. greenhouse gas emissions can be accredited to the buildings sector. Buildings-related tax incentives make up for about 14% of the total clean energy-related resources in the IRA, approximately $46.9 billion or about 17% of the $270 billion total in tax incentives. By making energy efficient enhancements affordable for developers, the IRA is making way for renewable energy to be incorporated into a wide variety of housing portfolios, including affordable housing.
Overview of Notable Tax Incentives for Clean Energy and Housing
Investment Tax Credit
The IRA retroactively modifies Sect. 48 of the IRC to extend and expand the ITC; most notably, the bill re-establishes the ITC to 30% for facilities that began construction on or after Jan. 1, 2022, and ending no earlier than Dec. 31, 2024. Starting Jan. 1, 2025, the ITC transitions to a technology neutral ITC at 30% until no earlier than Dec. 31, 2032. If emissions from electricity generation are more than 25% of 2022 levels after that, the 30% ITC remains in effect until emission are reduced to 25% of 2022 levels. Additionally, thanks to the IRA, the ITC no longer reduces LIHTC eligible basis.
In 2023, the base rate is 6% with options for a higher amount of 30% if the facility is under 1 megawatt (MW) or meets labor requirements. On Nov. 30, 2022, the U.S. Department of the Treasury released final prevailing wage and apprenticeship guidance. The release of the final regulations means the labor requirements on prevailing wage and apprenticeship programs are applicable to facilities, projects, property or equipment that begin construction after Jan. 28, 2023. In addition to the 6%/30% rates, there are several stackable bonuses potentially available, including a 10% domestic content bonus, a 10% “Energy Community” bonus, and a bonus for low-income communities of 10% or affordable housing and low-income economic benefit projects of 20%. The domestic content bonus encourages developers to use U.S. materials, and these materials include steel, iron or manufactured product for a renewable energy facility.
An “Energy Community” is defined as a brownfield; an area where a coal-fired power plant has closed since 2010, or a coal mine has closed since 2000; or a metropolitan or non-metropolitan statistical area where 0.17% or more direct employment, or at least 25% of local tax revenues, are related to extraction, processing, transport, or storage of coal, oil, or natural gas, and unemployment is at or above the national average in the previous year.
The bonus for low-income and affordable housing qualifications need to be met to receive these bonuses. For the 20% bonus, affordable housing and low-income economic benefit projects must be multifamily developments financed by the LIHTC and other federal housing programs as outlined in the Violence Against Women Act. The low-income communities in the 10% bonus are defined as eligible census tracts for the new markets tax credit or Indian areas as defined by Section 30D(g)(9) of the Internal Revenue Code. The Novogradac NMTC mapping tool has been recently updated to capture all of the communities eligible for this low-income community bonus. The low-income, low-income economic benefit project and affordable housing bonus are subject to a 1.8 GW environmental justice solar and wind (EJSW) capacity calendar year limitation, which may be carried over to a future year. The 1.8 GW calendar year limitation expires no earlier than Dec. 31, 2032, and may exist beyond that date subject to the same requirement of reducing emissions to no more than 25% of 2022 levels.
These provisions not only apply to new housing developments, but also can be added to existing housing to promote the use of renewable energy. The IRA creates an incentive for manufacturing key clean energy components and materials, promotes investments in low-income communities, and overall brings renewable energy to affordable housing properties.
Sect. 45L New Energy Efficient Home Tax Credit
The IRA extends for 10 years and modifies the section 45L new energy efficient home tax credit. The IRA builds upon proposals in previous versions of the reconciliation bill, allowing the 45L credit to not reduce LIHTC basis and retroactively extends the credit from Jan. 1, 2022, to Dec. 31, 2022. Starting in 2023, the IRA changes the rules on building eligibility (from residential buildings with three or fewer stories above grade to all residential buildings, single-family and multifamily), energy standards (from the International Energy Conservation Code to EPA’s ENERGY STAR and DOE’s Zero Energy Ready Home energy standards) and credit amounts and replaces them with the 2023-2032 rules. Additionally, developers are entitled to this credit if they meet the set qualifications. This specific provision will make the implementation more feasible for developers. These new rules expand the eligibility to all residential buildings, creates new energy standards and determines the credit amounts based on the energy standard and prevailing wages. Furthermore, like the ITC, the 45L no longer reduces LIHTC eligible basis.
Sect. 179D Energy Efficient Commercial Property Deduction
The IRA modifies Section 179D to expand energy efficient commercial property deduction. Though many provisions in the IRA have at least a 10-year life span, given reconciliation rule constraints, Section 179D was made permanent by the Taxpayer Certainty and Disaster Relief Act of 2020. Specifically, the IRA modifies the formula for computing the maximum amount of energy efficient commercial buildings deduction. The 179D deduction is only applicable to buildings of four or more stories above grade. However, unlike 45L and ITC, the LIHTC eligible basis still must be reduced by the amount of the 179D deduction, limiting the use of the deduction with LIHTC properties. This provision makes it easier for building owners to promote energy efficient standards and incentivizes energy efficiency. These modifications include increasing the deduction amount to $2.50/SF up from $1.88/SF, with a potential to increase the deduction up to $5, if new wage and apprenticeship requirements are met; modifying the energy efficiency standard, removing the partial deduction for a property that does not meet the certification requirements, and lastly, providing an alternative deduction for energy efficient building and retrofit properties. The Treasury and IRS have provided some guidance on Section 179D in light of the IRA proposals—Announcement 2023-1 was issued Dec. 23, 2022, and clarifies reference standards used to calculate energy-efficient commercial building property deductions under Section 179D in the wake of recent legislation.
Sects. 25C and 25D residential energy-related incentives
For owner-occupied homes, the IRA modifies the residential clean energy credit (sect. 25D), which incentivizes residential solar, wind, geothermal and biomass fuel energy. Sect. 25D applies a 30% credit for projects between 2022 and 2032, but the credit decreases to 26% for projects beginning in 2033 and 22% for projects beginning in 2034. Sect. 25C extends the credit for energy efficiency home improvements through 2032 and increases the credit from 10% to 30%. On Dec. 22, 2022, the Internal Revenue Service (IRS) released a frequently asked questions (FAQ) document sheet that covered many questions that have arisen concerning energy-efficient home improvement projects and residential energy property.
Treasury seeks input on IRA clean energy provisions
On Oct. 5, 2022, Treasury and the IRS issued six notices requesting information on subjects pertaining to the IRA. Specifically, the notices requested further information on the energy tax benefits in the IRA, with the deadline for comments on Nov. 4, 2022. Two of Novogradac’s working groups—the LIHTC Working Group and the Renewable Energy Working Group—submitted comment letters in response to four of the notices. Notice 2022-48 requested comments on the aforementioned incentives for residential and commercial building efficiency. Notice 2022-49 requests comments on energy generation incentives, including the annual 1.8 GW capacity limitation for ITC bonuses while Notice 2022-50 and Notice 2022-51 focus on payment of credits and requirements for incentives, respectively.
Overview of Notable Grants, Loans and Rebate Provisions for Clean Energy and Housing
HUD Green and Resilient Retrofit Program
The IRA includes several energy-related spending provisions affecting housing. It includes the HUD Green and Resilient Retrofit Program (GRRP), which appropriates $837.5 million through HUD for direct loans and grants to improve energy efficiency and climate resiliency in homes. The eligible recipients of this program include owners and sponsors of HUD-assisted Section 202, Section 811, Project-based Section 8 and Section 236 properties. The program can be used to improve water or energy efficiency, implement low emission technologies, address climate resiliency, or use energy and water benchmarking. This program is similar to a program established in the 2009 American Recovery and Reinvestment Act. The National Housing Trust (NHT), along with 20 signatories including Novogradac, submitted a comment letter in response to HUD’s Request for Information on GRRP recommending the department design the program based on best practices.
DOE High Efficiency Electric Home and Home Energy Performance-Based Whole House Rebate Programs
In November, the DOE announced that nearly $9 billion will be made available from the IRA to fund rebate programs, including specific state allocations. The High Efficiency Electric Home Rebate Program provides point of sale rebates for electrification upgrades and includes mean testing. For this program, the IRA appropriates $4.5 billion through fiscal year (FY) 2031. The Home Energy Performance-Based Whole House Rebates (HOMES Rebate) Program is a savings based retrofit program that creates an incentive for low- to moderate-income homes. The IRA appropriates $4.3 billion through FY2031 for this program. DOE will administer both rebate programs in collaboration with state energy offices, which also administer weatherization programs.
EPA Greenhouse Gas Reduction Fund
Lastly, the Greenhouse Gas Reduction Fund (GGRF) provides grants to support technical and financial assistance to reduce greenhouse gas emissions, functioning essentially as a nation green bank. This fund is significant due to the consequential greenhouse gas emissions from the building sector. Fossil fuel generated emission resulting from residential and commercial buildings accounts for 29% of total U.S. greenhouse gas emissions. The U.S. Environmental Protection Agency (EPA) will administer this $27 billion program, and funding will be available likely starting in February 2023 through September 2024. The fund set asides $15 billion to be targeted to low-income and disadvantaged communities. Community development financial institutions are expected to be among the applicants. Novogradac signed onto a comment letter submitted by NHT in response to an EPA request for information (RFI) recommending prioritized uses of the GGRF.
These spending programs address the timely need of climate resiliency through the improvement of energy efficiency and greenhouse gas reductions. These programs also concentrate funding on affordable housing and low-income or disadvantaged communities. The IRA not only is addressing climate resiliency through these programs, but environmental justice as well.
Per requirements detailed in the IRA, the bonus affordable housing solar ITC guidance will be released no later than mid-February 2023 and the GGRF and EPA grants will begin accepting applications that month as well. In August 2024, the HOMES Rebate Program will begin, and states can submit their individual spending plans. August 2024 will also be the end of the GGRF and the EPA grants. In September 2028, the HUD Energy Efficiency and Climate Resiliency Program funding must be spent. No earlier than 2032, the Bonus Affordable Housing Solar ITC expires, with the caveat that the ITC and the 1.8 GW capacity limitation for bonus ITC amounts may be extended beyond 2032 if carbon emissions from electricity production exceeds 25% of 2022 levels.
Novogradac Resources Can Help Industry Better Understand IRA
The IRA is a historic investment in affordable housing through its tax incentives and grant and rebate programs that further energy efficiency in homes. In total, the IRA provides $18 billion in federal grants and $36.5 billion in tax credits over the next 10 years in housing-related provisions. The IRA will assist developers in building a new housing stock, and the flexibility of these programs means that existing housing stock can also be improved. In summary, the IRA promotes energy efficiency and clean energy through a flexible implementation process that will work for developers, affordable housing residents, and communities in the United States.
The original bill had primary LIHTC unit financing and enhanced housing and community development spending proposals that were removed. Specifically, the IRA does not include the proposal to reinstate the 12.5% increase in 9% allocations, which expired at the end of 2021, or further increase the 9% allocations. The IRA also does not include provisions to lower the private activity bond financing threshold from 50% to 25%, or the more than $150 billion in community development and housing spending included in previous drafts.
Treasury will continue to conduct meetings with important stakeholders. Novogradac’s LIHTC and Renewable Energy working groups will continue to participate as opportunities are available.
To be a part of the discussion on how energy policy is shaped, consider joining the Renewable Energy Working Group, which recently opened its membership to the public, and the LIHTC Working Group, which includes this topic among its 2023 priorities.