2023 Tax Incentive Roundtable

174 EXPENSE AMORTIZATION

As of 1/17/2023, Internal Revenue Code Section 174 requires taxpayers to begin amortizing "research and experimental expenditures" over a five-year (5) year period using a Half-Year convention, starting with taxable periods ending after December 31, 2022. Section 174 Expenses are NOT the same item as Section 41 R&D Tax Credit Expenses (aka "Qualified Research Expenses" or "QREs"), but they are closely related. But unlike Section 41 which is an electable credit, this new Section 174 Expense Amortization would most likely be a requirement for many of your expenses and could have significant negative tax effects: particularly in the first few years.

However, based on the original non-policy-related budgetary reasons for this 174 Amortization requirement, current bi-partisan support to retroactively change back to the historical immediate 174 expensing, and the history of tax extenders and fixes that lapse from one Congress to the next, it is expected that the legislative fix will occur before many original filing deadlines for 2022 tax years.

It cannot be guaranteed that a "174 Fix" will ultimately happen, but with the likelihood still high that it will occur soon, it is recommended to strongly consider holding off on filing the Federal Tax Returns until the 174 legislative fix occurs (or final due date with extensions), and provide this consideration in close consultation with your Certified Public Accountant(s) (CPAs) and other trusted tax advisors. Should business needs require more immediate tax return filing, a Section 174 Amortization Study may be needed before filing in consultation with your CPA(s) and advisor(s).

45L HOME ENERGY TAX CREDIT (45L)

45L sees several changes with the IRA’s passage. The most notable is an extension as-is for the remainder of 2022 with a modified extension for 2023-2032. Here is a quick rundown of the credit changes starting in 2023:

45L HOME ENERGY TAX CREDIT CONTINUED

• Multifamily Buildings Over 3 Stories – mid and high-rise buildings are now eligible!
• Mixed-Use Buildings – proper??es with more than 50% residential sq. footage now eligible!
• HUD Projects – already require prevailing wages/green standards, so great 45L opportunity!
• Low-Income Housing Tax Credits – credits no longer reduced by 45L, so great 45L opportunity!

179D ENERGY EFFICIENT COMMERCIAL BUILDING DEDUCTION (179D)

The 2022 Inflation Reduction Act (IRA) was signed into law and provides new tax incentive opportunities for architects, engineers, contractors, and commercial property owners. The IRA increased the 179D Tax Deduction for commercial buildings placed in service in 2023 and beyond to as much as $5.00 per square foot for exceeding certain energy efficiency standards.

Additional Allocations for Designers/Builders?

• Hospitals
• Churches/Religious Organizations
• Private Schools/Universities
• Private Foundations

Real Estate Investment Trusts – REITs are now able to immediately deduct 179D Deductions!

Retrofit Projects – Building retrofits that improve on existing energy use intensity is now eligible!

INVESTMENT TAX CREDIT (ITC)

Section 48 of the Internal Revenue Code is generally known as the Investment Tax Credit or ITC. The ITC provides a tax credit for investment in renewable energy technology, such as solar, wind, and thermal storage. The credit ranges from 2% of the property basis up to 70% if various bonuses kick in, such as the domestic content bonus worth an additional 10% for raw materials and equipment sourced (or mostly sourced) from the United States. Tax-exempt entities are eligible for a direct payment option, and other taxpayers without tax liability can monetize through a one-time credit transfer.