IRA Tax Credits Provide Powerful Incentives for Investing in Sustainable Technology Design
The Inflation Reduction Act (IRA) of 2022 provides investment and production tax credits for building owners who invest in clean energy systems. These credits are meant to incentivize building clean energy systems in newly constructed buildings, and in existing buildings transitioning to clean energy design.
Now, for the first time, tax-exempt and governmental entities that do not owe federal income taxes are able to file directly for tax credits. For decades these tax credits have been available to for-profit businesses transitioning to the clean energy economy themselves or assisting non-profit entities in that transition. This is a significant change for municipalities building or upgrading their school or other facilities.
HMFH has a long history of partnering with municipalities to achieve their sustainability goals. Now we are able to help our clients take advantage of the IRA tax credit. Recently we helped the Town of Westborough, MA secure a $1.8 million tax credit for the ground-source heat pump system at Annie E. Fales Elementary School—the first energy net-positive elementary school in New England—and we are working with Bristol-Plymouth Regional Technical School to file for tax credits related to electrochromic glazing, three different PV systems, and potentially for EV charging. HMFH is committed to making the design and construction of buildings with a minimal carbon footprint affordable for all cities and towns seeking to create healthier and more sustainable learning environments.
“The partnership with HMFH Architects has been extremely advantageous. The Town of Westborough is excited that the Annie E. Fales Elementary School is the first municipal school project in Massachusetts to receive the financial benefit of the IRA tax credits. We hope that this expanded tax credit program continues to offer non-profit entities the same financial benefit as has existed for for-profit entities to enable more sustainable building projects.”
Stephen Doret | Chair, Westborough School Building Committee
Planning for these tax credits—and managing eligibility requirements—can seem complex and burdensome, especially for municipalities already stretched for administrative resources. HMFH helps navigate the steps by explaining the opportunity for the credits during the initial cost/benefit analysis that informs design-phase decision-making. We then work closely with municipalities and construction partners to monitor the process from early conceptual design through post-construction when taxes are filed.
In a time where construction costs continue to rise, IRA tax credits can help municipalities get faster paybacks for sustainable systems they desire. Below are examples of general tax credit highlights:
The value of tax credits
Typical of tax-related regulations, there are number of variables that determine the potential value of the tax credits. The math is based on accruing percentage levels based on meeting various criteria. The percentages are applied to both the soft (design) and hard (construction) costs. The base tax credits starts at 6% of the eligible costs and this number can rise to as much as 70%. Most projects will end up close to a 30% tax credit, but if domestically produced content criteria are met that could increase it to 40%, and if the community meets certain income criteria, that could increase it to 50%. If funds to pay for the work are sourced from tax-exempt bonds, there will be a 15% “haircut” or reduction of the tax credit to reflect that original savings in financing costs.
Timeline
The process for tax credits typically runs in parallel with the design phase associated with a project’s schedule. While the timeline for every new building or new system is driven by unique requirements, it is important to remember that no credits will be paid until the clean energy systems are installed and in service and the final tax documents are filed.
Despite the opportunities for substantial tax credits, some municipalities simply may not have the up-front resources to take advantage of them. This does not mean they need be shut out of cost-saving opportunities related to investing in clean energy systems. Power Purchase Agreements (PPAs) allow municipalities to partner with companies who manage the design, construction, and operation of these systems end-to-end in collaboration with the design team. The contracted company offering the PPA then takes the tax credit for itself and sells energy (or an agreed to dollar value savings) directly to the municipality, often selling any excess energy generated by the building on the open market. It’s a profit generator for the PPA company and helps communities who may have early cash-flow challenges keep energy costs low. The true benefit of the IRA is that non-profits and municipalities can now take advantage of the full potential savings – both for installation and operation of these energy efficient systems.
HMFH can help guide communities through a process to determine appropriate systems and mitigate financial risk for building owners wishing to design more climate resilient schools with a reduced carbon footprint and lowered, long-term energy costs.
