By: Marika Erdely, MBA, CEA, LEED AP BD+C, Fitwel Ambassador
Founder and CEO
Green Econome
The incentives outlined in this article, introduced under the Inflation Reduction Act, are expected to remain available through the end of the current Biden administration – ending Jan 20, 2025. However, with the recent election of Donald Trump as the next President, there is a possibility these incentives could be revised, reduced, or rolled back under the new administration. For those considering taking advantage of these benefits, it is advisable to act promptly to secure the available tax savings while they remain in effect.
As members of AIR CRE, it’s important for commercial real estate professionals to be aware of the opportunities provided by the Inflation Reduction Act (IRA), signed into law in 2022. This landmark legislation presents significant tax benefits for building owners and operators, allowing them to reduce operating costs and emissions while enhancing cash flow. The Act also offers transferable benefits, and even non-profits can receive cash tax payments to support sustainable building projects.
Section 179D: A Valuable Tax Deduction for CRE Projects
Section 179D provides a substantial tax deduction that reduces the taxable income of property owners before tax liabilities are calculated, offering meaningful savings. This deduction has been available for several years and now includes retroactive opportunities for projects completed in 2020, 2021, and 2022. A new, more favorable version of the deduction took effect on 1/1/2023 and will apply to projects through 12/31/2026. After 2027, the deduction will still be available, but under less advantageous terms.
Calculating 179D for New Construction or Large Retrofit Projects
The deduction is based on an energy model, which compares the property’s energy efficiency against the standards set by ASHRAE 90.1 (2007). In California, for example, buildings retrofitted to comply with Title 24 (2022) will likely already exceed these standards by a wide margin. The greater the energy efficiency gain achieved through the retrofit, the larger the deduction. For projects that meet prevailing wage requirements, the deduction can be up to five times higher—making this a particularly attractive incentive for large-scale commercial real estate projects.
The formula is straightforward: multiply the square footage of the building by the efficiency rate, then apply the owner’s tax rate to determine the potential deduction. This means larger properties yield higher deductions, but even smaller projects can see significant savings depending on the extent of the improvements. For best results, plan to complete all qualifying projects within the same tax year.
Solar & Battery Storage: Key Opportunities in the IRA
The IRA also boosts federal tax credits for solar and battery storage installations. These credits directly reduce tax liability, providing pure cash flow to property owners.
Federal Investment Tax Credits (ITC) for Solar and Battery Storage
Under the IRA, the Federal Solar Investment Tax Credit (ITC) for solar and battery storage increased from 26% to 30% of the project cost, valid through 2033. This credit applies to both new systems and substantial upgrades, offering a direct path to reducing tax burdens while modernizing properties for sustainability.
In addition, there are two bonus credits worth 10% each, if applicable:
- Energy Community Bonus: Properties in designated “energy communities”—areas impacted by fossil fuel investments or with high unemployment rates—qualify for an extra 10% credit. Much of Los Angeles County is currently designated as such, though this map is subject to change.
- Domestic Content Bonus: If 40% or more of the project materials are U.S.-made, you may qualify for another 10% bonus. This is harder to achieve but adds significant savings, if applicable.
Moreover, projects benefit from federal MACRS Bonus Depreciation and state-level depreciation benefits, offering further tax deductions on top of these credits.
By the Numbers: Cash Flow for Solar and Battery Storage Projects
Let’s examine some examples of tax savings when installing a solar PV system or an energy storage system. Many people aren’t aware of just how much these tax incentives can help to cover the cost of the project. The numbers speak for themselves.
Energy Storage System (90kW/220kWh)
| Gross System Cost | $ 318,244.00 | |
| IRA ITC (30% + 10% Energy Community) | $ (127,298.00) | -40% |
| SCE SGIP Rebate Program to Owner | $ (55,750.00) | -18% |
| Federal MACRS Bonus Depreciation | $ (53,465.00) | -17% |
| State (CA) MACRS Depreciation | $ (31,824.00) | -10% |
| Net Project Cost to Owner | $ 49,907.00 | -84% |
| Estimated Electricity Savings (Year 1) | $ 20,939.00 | |
| Estimated Total Net Savings (15 Years) | $ 260,574.00 | |
| Payback Period | 3.1 Years |
Solar PV System (29.4 kW-DC)
| Gross System Cost | $ 110,344.00 | |
| IRA ITC (30% + 10% Energy Community) | $ (44,137.00) | -40% |
| Federal MACRS Bonus Depreciation | $ (27,807.00) | -25% |
| State (CA) MACRS Depreciation | $ (8,828.00) | -8% |
| Net Project Cost to Owner | $ 29,572.00 | -73% |
| Estimated Annual Electricity Savings (Year 1) | $ 9,700.00 | |
| Estimated Total Net Savings (25 Years) | $ 419,117.00 | |
| Payback Period | 3.8 Years |
Tax Benefits Can Cover Over 80% of the Project Cost
The tables above illustrate how HUGE these tax incentives are. In just over 3 years, the entire cost of the energy storage system will have paid itself back. The battery can offset peak kW demand costs in high Time-of-Use (TOU) rates.
Maximizing IRA Benefits for AIR CRE Members
For members of AIR CRE, understanding and leveraging these incentives can dramatically increase cash flow and reduce the cost of property improvements. Whether you’re developing new buildings or retrofitting existing structures, the IRA offers substantial financial and environmental rewards. By planning strategically, you can optimize these tax credits and deductions to drive long-term savings and sustainability in your commercial real estate portfolio.
Green Econome is a full-service energy and water efficiency consulting and construction firm, assisting commercial real estate owners reduce their operating costs and increase property values by providing custom solutions to complex environmental challenges as well as ESG and sustainability goals.