Inflation Reduction Act: ESG provisions may provide benefits to the real estate industry

In brief

The Inflation Reduction Act of 2022 (Act), enacted August 16, extends and modifies several existing energy tax credits, creates new energy tax credits (collectively, ‘tax credits’); and modifies the existing Section 179D deduction. These changes may be of particular interest to the commercial real estate industry at a time when environmental, social and governance (ESG) initiatives are important to the C-suite. The Act also creates a mechanism to allow a broader spectrum of taxpayers to benefit from the tax credits, either through a new refundability option or through new transferability options. 

Although taxpayers will need to evaluate risks for the transferability option, including navigating due diligence and indemnification where necessary, this change can provide a broader set of taxpayers (many of which own significant amounts of real estate) the ability to utilize tax credits that otherwise have not been available as a practical matter and may help spur further investments in ESG initiatives. However, real estate investment trusts (REITs) and certain tax-exempt entities should be mindful that the energy-related activities these tax credits are intended to incentivize may impact their REIT qualification or generate unrelated business taxable income (UBTI), respectively.

Action item: On October 5, the IRS issued notices that request comments from the public on defined terms, application, timing, and other issues regarding various provisions in the Act. These comment requests relate to the production tax credit (PTC); the investment tax credit (ITC); the workforce requirements, domestic content requirements, and energy community requirements for the PTC and ITC; the Energy Efficient Home Credit and Energy Efficient Commercial Buildings Deduction; and the transferability and refundability of certain tax credits. The IRS will accept comments by November 4. As the IRS is seeking to clarify the Act in a manner that reduces uncertainty, taxpayers may wish to comment on provisions in the Act that currently may not be clear.