Information Costs, Section 179D, and the Slow Uptake of “Greening” Nonprofit Buildings

The Inflation Reduction Act brought about a host of incentives aimed at catalyzing a shift to renewable energy. Yet, the response from nonprofits to retrofit their physical spaces to accommodate renewable energy sources appears to be lagging other sectors. So, why aren’t more nonprofits taking advantage of incentives to turn their physical spaces “green”? Amy Turner (Columbia) has an excellent and informative blog post on the Climate Law Blog in which Section 179D is framed as the culprit. Here’s a snippet:

“Under the IRA, clean electricity technologies like distributed solar and wind, battery storage, and geothermal energy, along with electric vehicles and charging stations, are the subject of tax credits that cover between 30 and 70 percent of eligible project costs. In contrast, the IRA’s main tax tool for building decarbonization is a tax deduction that nontaxable entities can transfer to a limited set of other parties but cannot use directly. Section 179D offers a $0.50 to $5.00 per square foot tax deduction (inflation-adjusted) for whole-building energy efficiency retrofits that achieve a 25 to 50 percent reduction in energy costs as compared to the ASHRAE 90.1 Reference Standard or a 25 to 50 percent reduction in building energy use intensity (a measure of energy use per square foot) as compared to the building’s own baseline. In either case, the deduction is capped at the cost of qualifying equipment and retrofits: interior lighting systems, HVAC and water heating equipment, and improvements to the building envelope.

Though the 179D deduction is not eligible for elective pay, it is available to local governments and other nontaxable entities in that a public or nonprofit building owner can transfer the deduction to the designer (specifically an architect, engineer, contractor, or subcontractor) of the building improvements underlying the deduction. Thus, they can offer the deduction to a designer in the hopes of negotiating down the designer’s price. In this way, Congress allowed for the broad applicability of the 179D deduction in the public and nonprofit sectors, but these sectors face significant practical challenges in taking advantage of it.

In particular, nontaxable entities are acting with imperfect information when transferring the 179D deduction, as the project designer will almost certainly balk at disclosing the sensitive business information – taxable income and tax rate – that would help the parties properly value the deduction and use it to negotiate price. The transaction costs associated with negotiating the value of the deduction can be significant, with the municipal representative or nonprofit building owner either using internal capacity or hiring outside advisors to assess the value of the deduction and ensure that qualifying costs are spent in connection with whole-building energy reductions – a more difficult endeavor than a simple percentage or set deduction amount with no performance requirement.”

In other words, the business realities of passing on the deduction could create frictions for nonprofits in simply trying to avail themselves of the incentives Congress intended them to use. Information costs, a particularly pernicious transaction cost, are getting in the way. So, what can be done? Turner observes:

“In an ideal scenario for nontaxable entities, Congress would enact a building decarbonization tax credit payable directly to nontaxable entities via elective pay. Absent such a solution, support will be needed help nontaxable entities value their 179D deductions, negotiate with designer counterparties, document their agreements in contract and ensure designers are properly reporting 179D transfers with the IRS. As the elective pay process for tax credits begins to hit its stride, 179D is a natural place for the IRS, technical assistance providers, and advocates to next turn their attention.”

Hear, hear!

 

Christopher J. Ryan, Jr.

Indiana University Maurer School of Law