The Inflation Reduction Act (IRA) signed into law by President Biden on August 16, 2022, included an expansion of existing tax credits to promote clean energy generation. One of the credits impacted by the IRA is the business energy credit for solar property under Internal Revenue Code (IRC) Section 48(a)(3)(A)(i). The changes to the IRC Sec. 48 energy credit brought upon by the IRA are good news for low-income housing tax credit projects.
In the last decade, it was common to see a photovoltaic system installed during development of an affordable housing project and for owners to receive a 30% federal energy tax credit under IRC Sec. 48(a)(3)(A)(i). Prior to enactment of the IRA, the 30% tax credit for installing a photovoltaic system was scheduled to be phased down and then phased out. Please refer to our previous blog Business Energy Credit Impacted by the Consolidated Appropriations Act that was released on 2/1/2021.
With enactment of the IRA, the phasedown from a 30% credit to a 26% credit is now only applicable to construction of solar properties that began in 2020 or 2021, and which were placed in service before January 1, 2022. In addition, the IRA has eliminated the phaseout of the business energy credit under IRC Sec. 48(a)(3)(A)(i).
And more good news from the IRA is the change in how the Sec. 48 credit will impact eligible basis for the low-income housing tax credit. Prior to enactment of the IRA, the rule under IRC Sec. 50 requires that the basis of property be reduced by 50% of the Sec. 48 credit. The IRA has now added IRC Sec. 50(c)(3)(C) that says for the purposes of determining basis eligible for the Sec. 42 low-income housing credit, the rule that required the reduction of basis by 50% of the energy credit shall not apply. The change in Sec. 50(c)(3)(C) is effective for property placed in service after 12/31/2022.
If you have any questions about the business energy credit for solar property, please contact us at firstname.lastname@example.org or your engagement lead member directly.