While tax credits and deductions typically don’t provide much benefit to nonprofits, if any at all, recent changes to the Inflation Reduction Act (2022) that were passed in 2023 now provide incentives to qualifying nonprofit organizations. Foremost among these changes is the amendment to Section 179D of the Energy Policy Act, which offers a deduction to organizations that own energy-efficient buildings.
The Section 179D tax credit is available to commercial building owners who build or renovate their buildings to be energy efficient. The credit requires the energy usage of the building to be reduced by at least 25%. It can be triggered by improvements (or new selections) of energy-efficient HVAC, interior lighting, the building envelope, and various mechanical systems. The building must be a commercial building that conforms to ASHRAE Standard 90.1-2007, which may include dormitories; buildings owned by the government or a government agency, such as schools, community centers, libraries, courthouses, and public housing, among others; and commercial or industrial buildings or those converted to that purpose. However, single-family and multi-family housing (with three stories or less), manufactured homes, and any building that does not use electricity or fossil fuels will not be eligible.
Not only has the Section 179D credit been expanded to allow nonprofits to benefit, but the incentives it offers have also greatly increased. While buildings placed in service before 2023 are only eligible for a deduction of up to $1.88 per square foot, buildings that are placed in service between January 1, 2023, and December 31, 2032, are eligible for up to $5.00 per square foot in deductions, based on various factors including the overall reduction in energy consumption. Notably, the updates to Section 179D account for inflation, so projects completed and placed in service during 2023 may be eligible for an increased deduction (up to $5.36), and projects completed during 2024 may be eligible for up to $5.65, provided prevailing wage and apprenticeship guidelines have been met.
While nonprofit organizations are still unable to benefit from a tax “deduction” as such directly, the Section 179D amendment allows nonprofit organizations to allocate this deduction to the designers, architects, engineers, or other contractors and providers that worked on the renovation or construction of the building. Any nonprofit organization that owns a qualifying building can allocate the deduction to any of the taxpaying entities mentioned above. This is done through an “Allocation Letter,” which allows the designer, engineer, or other contractor responsible for the improvements to take the deduction themselves and subsequently reduce the contract price for the nonprofit organization.
This is a simple process for a big benefit. Reducing your building’s carbon footprint is an important step towards slowing climate change and reducing the global temperature. The IRS is making those improvements worth your while! If your nonprofit organization is considering upgrades to your building or is considering expanding to a new building altogether, please reach out to our team of Renewable Energy Tax experts at Tri-Merit, and we will help you get the best deductions and allocations possible!