Planning to make your healthcare facility a greener space? With passage of the Inflation Reduction Act (IRA), signed into law in August 2022, a new package of energy incentives presents a compelling case for doing just that.
The IRA was the largest climate change legislation ever enacted in the U.S., providing $500 billion in tax incentives and grant and loan programs. The goal is ambitious: to remove approximately 3.8 billion tons of carbon dioxide from the atmosphere by 2035 by providing incentives and tax credits for efforts to reduce greenhouse gas emissions.
Because of this legislation, the U.S. healthcare system is a prime candidate for decarbonization, as the new tax credits offer real value. “If your healthcare organization is considering or planning an energy project, these are amazing energy incentives,” said Grant Thornton Tax Legislative Affairs Practice Leader Dustin Stamper.
The new incentives represent an unprecedented opportunity for both nonprofit and for-profit hospitals, which can now monetize tax credits without tax equity financing. “For the first time ever, taxpayers can actually directly sell these credits,” Stamper said. “Even if you aren’t going to be taxable for a while, these credits offer real incentives and opportunities. Nonprofit healthcare organizations can also benefit from tax incentives even though they don’t owe taxes by getting direct refunds from the IRS, something they were not able to do before.”
At a high level, the economics have changed significantly, and it is more compelling than ever to pursue generation, storage and efficiency measures for healthcare facilities. “Taking advantage of these savings and opportunities for credits makes a lot of sense for healthcare organizations, especially those with significant ESG goals.”
Four credits in particular that were modified by the IRA should offer the greatest value for the healthcare industry.
Electrical generation and storage credits
The IRA extends the existing Section 45 Production Tax Credit for electricity produced from renewable resources to include solar facilities. “You can also earn a credit for stand-alone energy or thermal energy storage, which makes the case for these systems even more compelling, especially compared with diesel generators,” Stamper said.
To qualify, eligible facilities mut be placed in service before the end of 2024. “This credit is based on utility-scale electricity production,” Stamper added. “In our opinion, the Section 48 ITC will make more sense for most healthcare facilities.”
These two updated sections re-establish opportunities to claim either a tax credit of 30% to 50% tax credit based on the cost of the project, or 2.75 cents per kW credit for electricity produced for 10 years. The credits are available for a variety of renewable energy types. “One caveat, though, is that the credit will not be earned until after the project is placed in service,” said Grant Thornton Federal Tax Services Partner Michael Sinese. “So, you’ll want to consider what your upfront capital outlay will be.
“Another catch is that, for larger-scale projects, 1MW or more of storage capacity, you need to meet prevailing wage and apprenticeship rules to get the most out of the credits. Although that can add costs and headaches, the cost will be well worth receiving the 30% credit.”
Projects can also qualify for a 10% bonus credit if 100% of the steel or iron used in the project—and/or 40% of the components—were produced in the U.S. This means you need to request detailed documentation from suppliers.
With updates to these two sections, there are more energy properties that qualify for energy credits.
The table lists the types of property that qualify for the updated Section 45 Production Tax Credit (PTC) and Section 48 Investment Tax Credit (ITC) for electricity produced from renewable resources.
Energy-efficient commercial building deduction
Section 179D is not a credit, but a deduction that can be taken for the construction of energy-efficient property and is available for new construction, rehabilitation, or remodel/retrofits of commercial buildings and residential properties that are four stories or more. The IRA significantly increased the deduction amount for HVAC, lighting and building envelopes within properties which meet minimum energy efficiency standards.
For-profit organizations can take the deduction on their tax returns, and the IRA opened the deduction to all tax-exempt organizations. “The catch is that the deduction is allocated to the designer,” Sinese said. “In order to benefit from the deduction, you need to allocate it to your designer and negotiate upfront with them for breaks in your contracts.” The deduction can only be assigned to a contractor that is the designer of record and can only be claimed when the building is placed in service or is renovated.
Section 179D will have a lower base deduction amount of $0.50 per square foot. To achieve the maximum deduction of $5 per square foot, an applicant must meet prevailing wage and apprenticeship requirements. “When evaluating contracts for new projects, you should take care to determine whether it’s worth it to you to meet those requirements,” Sinese said.
Qualified commercial clean vehicle credit
Tax-exempt healthcare organizations can also earn credits for qualified clean commercial vehicles and mobile machinery acquired after 2022. Vehicles must be used for business purposes. The credit is equal to 15% of the basis of a qualified vehicle—or 30% if the vehicle is not powered by gas or diesel, but can be limited to the cost difference of similar vehicle that uses traditional fuel. The maximum credit is $7,500 for vehicles under a 14,000 gross-vehicle-weight rating and $40,000 for all other qualified vehicles.
Alternative fuel vehicle refueling property credit
Healthcare organizations can also earn a 30% tax credit for installing electric vehicle charging stations and other alternative fueling property. The qualifying property was expanded to include charging stations for two- and three-wheeled vehicles and bidirectional charging equipment. Beginning in 2023, however, the new credit will be limited to property placed in service in non-urban census tracts and census tracts eligible for the new markets tax credit.
The IRA presents healthcare organizations with a unique opportunity to reap potentially refundable tax benefits from the green investments they are making. Healthcare organizations can navigate these complex new credit and monetization options, sometimes with the help of third-party advisers, to pursue current and planned energy projects.
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