What the Inflation Reduction Act (IRA) Means for Buildings

It has been nearly a year since the Inflation Reduction Act (IRA) was signed into law, releasing roughly half a trillion dollars in new spending and tax breaks that aim to foster clean energy, reduce healthcare costs, and increase federal tax revenues.

Although much has been said and written regarding the IRA and what it does and does not accomplish, the implications for the building design and construction industry may remain unclear.

Below is a five-part primer to introduce what the IRA accomplishes for the building sector.

1. IRA funding breakdown

The Rocky Mountain Institute (RMI) has served as a consistent source of reputable insights on what the implications of the IRA could be for the building design and construction industry. A recent summary by the American Institute of Architects (AIA) and RMI amassed a total investment by the US federal government from the IRA and the Bipartisan Infrastructure Law of over $761 billion. This figure rivals the country's national defense budget in 2022 ($766 billion).

According to RMI and AIA, approximately 6% of the total investment is allocated specifically for buildings at just over $48 billion.

Figure: Funding breakdown of the combined investment from the Inflation Reduction Act and Bipartisan Infrastructure Law. Figure adapted by Daniel Overbey.

2. Two types of incentives to pay attention to: rebates and tax credits

The IRA supports a wide range of programs, grants, rebates, tax credits. Building owners and building design and construction professionals will be most interested in the rebates and tax credits intended to modernize and upgrade the country's existing and emerging residential and commercial building stock to be more affordable, resilient, energy efficient. The programs in the IRA build upon investments in the Bipartisan Infrastructure Law, including the $3.5 billion expansion of the Weatherization Assistance Program to improve home energy-efficiency and increase electrification for low-income families - with a particular emphasis on heat pumps.

Nearly $9 billion in the IRA will go toward consumer home energy rebate programs, which the US Department of Energy (DOE) estimated will save consumers approximately $1 billion annually as appliances become more efficient and affordable.

3. The 178D tax deduction and Investment Tax Credit (ITC) are revised

While most of the rebates and tax credit program center on the residential sector, there are two notable commercial programs:

Energy Efficient Commercial Buildings Deduction (179D). The 26 U.S. Code § 179D tax deduction is revised in the IRA. The base tax deduction is $0.50 - $1.00 per square foot, depending on increase in efficiency, with deduction over four-year periods capped at $1 per square foot (inflation adjusted). Alternatively, taxpayers can seek a deduction for qualified retrofit plans that reduce a building’s energy use intensity by at least 25%. There is a bonus deduction at five times the base amount if the project meets prevailing wage and registered apprenticeship requirements. (The IRS recently clarified that the percent improvement is relative to the most recent version of ASHRAE Standard 90.1 on the year when the building is placed in service.)

Business Energy Investment Tax Credit (ITC). The IRA modifies and extends the current 26 U.S. Code § 48 Business Energy ITC through the end of 2024; then, the new 26 U.S. Code § 48E Clean Electricity ITC kicks in. Both programs provide considerable tax credit toward the purchase and installation of eligible renewable/clean energy technology. For both the extended and future tax credits, the IRA structures them to incentivize investment in disadvantaged communities and newly created well-paying jobs. The Clean Electricity ITC will be phased out as the U.S. meets greenhouse gas emission reduction targets. Also, unlike the Business Energy ITC, the Clean Electricity ITC is not technology specific.

4. IRA allows direct pay of many tax credits - even to tax-exempt entities; some tax credits are also transferrable for certain taxpayers

For any eligible tax credit, pay careful attention to the details. For instance, the IRA opens up new opportunities for financial incentives via tax credit programs - even for tax-exempt entities in certain instances:

Some IRA's tax credits are eligible for direct pay. Many of the tax credit programs introduced or revised as part of the IRA allow for direct pay for entities that generally do not benefit from income tax credits, such as states, localities, tribes, rural cooperatives, and nonprofits. Under such scenarios, entities that generally do not benefit from income tax credits can elect to receive these tax credits in the form of direct payments and pass 100% of the cost savings to customers.

Some IRA's tax credits eligible for direct pay are also transferable. Under such scenarios, taxpayers that are generally ineligible for direct payment of credits may transfer all or a portion of certain credits to an unrelated party in exchange for cash.

(Again, check the details. For example, the aforementioned 179D tax deduction is not a tax credit, not eligible for direct pay, and it not transferrable.)

5. A building investment of $48 billion might not go as far as you think

In many ways, $48.1 billion is an enormous investment - a magnitude rivaling the GDP of Latvia or Bolivia. However, if we frame the funding within the context of national construction spending, it is but a drop in the bucket. The U.S. Census Bureau estimated the seasonally adjusted value of national construction spending in 2022 at just over $21.5 trillion. Based on this figure, the IRA funds for buildings account for 0.22% of total construction spending. It is a start and will certainly make it economically viable for many residential and commercial developments to pursue more ambitious sustainability objectives; but $48 billion alone is more of a push toward a more decarbonized and healthier built environment rather than a shove. Nevertheless, it should be reiterated: every little bit matters.