Republican members of the House Ways and Means Committee approved their proposed tax legislative package along party lines this week, including measures on business interest deductibility, bonus depreciation, and opportunity zones. (Tax Notes, June 14 | Ways and Means Committee, June 13 and Roundtable Weekly, June 9)
Tax Measures and CRE
- On Wednesday, Ways and Means Committee Chairman Jason Smith (R-MO), Committee Member Brad Schneider (D-IL), and Ways and Means staff spoke with Roundtable Members about the tax measures and other issues at The Roundtable’s all-member Annual Meeting in Washington, DC during the Tax Policy Advisory Committee (TPAC) session. [Photo left to right: Roundtable Chair John Fish (Chairman and CEO, SUFFOLK), Roundtable President and CEO Jeffrey DeBoer, and Committee Chairman Jason Smith]
- The three tax bills sent to the House floor for a potential vote next week contain $237 billion in business and individual tax cuts, financed by the repeal or modification of several energy tax incentives enacted in last year’s Inflation Reduction Act (IRA). However, differences in the GOP caucus and requests from some Republicans to include a boost in the $10,000 deduction cap on state and local taxes (SALT) could push a vote until after the congressional July 4 recess. Any Republican tax package passing the House would face significant opposition in the Democrat-controlled Senate and the White House. (Tax Notes, June 16)
- The committee’s proposals relevant to real estate include:
- Business interest deduction. The Build It in America Act would provide a 4-year extension (through 2025) of certain, taxpayer-favorable business interest deductibility rules that applied from 2018-2021. The proposal would allow more real estate businesses to operate under the general rules of section 163(j) and its preferable cost recovery schedules. (H.R. 3938 and summary)
- Bonus depreciation. H.R. 3938 also includes a 3-year extension (through 2025) of 100% bonus depreciation for qualifying capital investments, including equipment, machinery, and interior improvements to nonresidential property (“qualified improvement property”). Bonus depreciation is 80% in 2023 and gradually phasing down.
- Opportunity Zones. The Small Business Jobs Act would establish special, favorable rules for investments in rural opportunity zones. It would also create a new and detailed information-reporting regime for all opportunity funds. (H.R. 3937 and summary)
Energy Tax Credits Transferability
- The Biden administration this week proposed rules on transferring clean-energy tax credits under the IRA. Treasury’s proposed guidance released on June 14 seeks to clarify numerous issues, including which entities would be eligible for each credit monetization mechanism, laying out the process and timeline to claim and receive an elective payment, and transferring a credit. (Tax Notes, June 15 |The Wall Street Journal, June 14 | IRS news release)
- Secretary of the Treasury Janet Yellen stated, “The Inflation Reduction Act’s new tools to access clean energy tax credits are a catalyst for meeting President Biden’s historic economic and climate goals. They will act as a force multiplier, bringing governments and nonprofits to the table.” (CNBC and Treasury news release, June 14)
- The Roundtable’s Tax Policy Advisory Committee (TPAC) and Sustainability Tax Policy Committee (SPAC) will analyze the impact of the transferability rules on commercial real estate for potential comments on the proposed rulemaking. SPAC’s meeting on Wednesday during The Roundtable’s Annual Meeting included a presentation about an online marketplace for exchanging such tax credits.
Climate Disclosure Regs
- Separately, the Securities and Exchange Commission (SEC) expects to issue new climate disclosure rules by October, a year later than the original target date. The new date was included in a SEC rule-making agenda and schedule released on Tuesday.
- Legislation to constrain future SEC disclosure requirements was reintroduced this week by Sen. Mike Rounds (R-SD) and nine of his Senate colleagues. The bill includes language stating that an “issuer is only required to disclose information in response to disclosure obligation adopted by the Commission to the extent the issuer has determined that such information is important with respect to a voting or investment decision regarding such issuer.” Rep. Bill Huizenga (R-MI) is sponsoring a version of the bill in the House. (Sen. Rounds news release and Politico Pro, June 15)
The Roundtable’s SPAC will continue to track any developments related to the SEC’s forthcoming rule on climate reporting, including its proposal for sweeping disclosures on Scope 3 GHG emissions affecting CRE. (Roundtable Weekly, March 10)
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The Senate Finance Committee on Wednesday advanced an improved energy efficiency tax deduction for commercial buildings (Section 179D) that would make the incentive more usable for “retrofits” of older buildings, multifamily structures, and REITs. (Clean Energy for America Act (S. 1298), mark-up video and supporting documents)
Section 179D & CRE
- The modified bill introduced by Chairman Ron Wyden (D-OR), above, included amendments originally proposed by Sen. Ben Cardin (D-MD) to improve Section 179D. Overall, the bill would replace a patchwork of more than 40 energy tax policies with incentives for commercial and residential energy efficiency, clean electricity, and clean transportation fuels, and eliminate fossil fuel subsidies.
- The Section 179D enhancements would allow:
- A retrofit project tax deduction for efficiency investments that lower an existing building’s energy consumption from a “pre-retrofit” baseline measured through EPA’s Portfolio Manager benchmarking tool;
- All multifamily buildings to qualify for the Section 179D incentive;
- REITs to benefit from the incentive by allowing the amount of the 179D tax deduction to reduce earnings and profits (“E&P”) in the year that energy efficient equipment is placed in service.
- The legislation also includes new rules requiring that taxpayers claiming Section 179D or other tax benefits in the bill comply with the Department of Labor’s prevailing wage standards and use qualified apprentices for at least 15 percent of the labor hours associated with any construction, alteration, or repair work on the project.
Davis-Bacon Prevailing Wage Concerns
- The Roundtable’s letter opposed new prevailing wage mandates proposed by the bill. The Roundtable warned that the excessive costs from Davis-Bacon compliance will greatly exceed the amount of any tax deduction that Section 179D might provide to incentivize an energy efficient construction project.
- “Davis-Bacon has never been applied simply because the Internal Revenue Code provides a deduction to lower a private entity’s taxable income,” the letter stated. “The Roundtable recommends that the Clean Energy for America Act avoid unchartered territory that would transform the Internal Revenue Code into a ‘Davis-Bacon Related Act.’”
- Committee Ranking Member Mike Crapo (R-ID), above, said, “I cannot support attaching labor requirements to energy tax policy. Linking labor policy to energy-related tax credits is unprecedented, and I have concerns not only about the policy, but also about the dangerous precedent it sets for amending the tax code.”
- After the committee voted 14-14 along party lines to advance the $260 billion energy tax bill, Chairman Wyden said he would place the bill on the Senate calendar. (CQ, May 26).
- The bill’s prospects in the full Senate are uncertain, yet specific elements within the bill could be incorporated into a larger economic package proposed by President Biden. Wyden has not said whether he will work to roll the measure into the president’s infrastructure plans. (BGov, May 26)
Energy and tax policies affecting commercial real estate will be a focus of discussions during The Roundtable’s June 15 all-member Annual Meeting – and during its June 16 Tax Policy Advisory Committee (TPAC) and Sustainability Policy Advisory Committee (SPAC) Meetings.
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Roundtable-supported legislation that would accelerate depreciation for high performance upgrades in commercial and multifamily buildings – creating jobs and reducing the built environment’s carbon footprint – was reintroduced this week by House Ways and Means Committee members Brad Schneider (D-IL) and Tom Rice (R-SC).
The E-QUIP Approach
- The bipartisan Energy Efficient Qualified Improvement Property (E-QUIP) Act (H.R. 2346), originally introduced last December by Reps. Schneider and Rice, encourages energy efficiency building retrofits to replace aging and obsolete HVAC, lighting, windows, roofs, and windows with state-of-the-art systems.
- The Real Estate Roundtable has rallied a unique coalition of environmental, manufacturing, and business groups to support the bill. The coalition sent an April 1 letter to members of the House Ways and Means Committee, and the Energy and Commerce Committee, to enact the E-QUIP Act and include it in any infrastructure package.
- Roundtable President and CEO Jeffrey DeBoer stated, “The E-QUIP Act checks all of the boxes for smart energy, climate, and economic policy. Installation of high performance HVAC, lights, windows, and other building components will modernize aging buildings, save businesses billions of dollars on their energy bills, create tens of thousands of jobs, and avoid carbon emissions equal to taking 22 million cars off the road for a year.”
- DeBoer added, “The E-QUIP Act can also encourage state-of-the-art retrofits that enhance outdoor air ventilation rates — a key practice to improve a building’s health and indoor air quality, according to the best available science.”
Support for an Energy Efficient Economy
- The American Council for an Energy-Efficient Economy (ACEEE) has prepared a fact sheet and analysis that estimates the climate, energy, and jobs benefits of E-QUIP Act retrofit projects:
- 130,000 net additional job-years.
- $15 billion energy bill savings.
- 100 million tons of carbon dioxide emissions avoided – or the equivalent emissions from 560,000 rail cars full of coal or taking 22 million cars off the road for one year.
- Key elements of the E-QUIP Act are:
- Elective 10-year, straight-line cost recovery period for a new category of depreciable property that meets the E-QUIP Act’s high-performance standards.
- Available to replace or retrofit systems and components in buildings that are at least 10 years old.
- Certification requirement that E-QUIP is designed, installed, operated, and maintained by credentialed professionals.
- Five-year duration of incentive.
- A uniform 10-year depreciation period for components that meet E-QUIP standards would simplify the current cost recovery “patchwork” in the federal tax code for building investments.
The E-QUIP Act and advocacy efforts to include it as part of infrastructure legislation will be a focus of discussion during The Roundtable’s April 20 (Remote) Spring Meeting.
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New legislation introduced this week by House Ways and Means Committee members Brad Schneider (D-IL) and Tom Rice (R-SC) would accelerate depreciation for high performance upgrades in commercial and multifamily buildings – creating new jobs in the construction, design, and energy sectors; boosting equipment manufacturing; and reducing the built environment’s carbon footprint. (Rep. Schneider news release, Dec. 9)
- The Energy Efficient Qualified Improvement Property (E-QUIP) Act proposes the establishment of an elective 10-year, straight-line cost recovery period for a new category of E-QUIP expenditures that meet strict energy efficiency criteria. The E-QUIP benefit would apply to “above code” heating and cooling equipment; lighting; building shell components (e.g., roofs, insulation, and windows); and “smart controls” (e.g., web-enabled thermostats, occupancy and daylight sensors) – as long as they are installed through 2025.
- Real Estate Roundtable President and CEO Jeffrey D. DeBoer helped to launch support for the E-QUIP Act during a Dec. 8 virtual meeting led by Reps. Schneider and Rice that reached a spectrum of stakeholders representing environmental, manufacturing, and real estate organizations.
- “The E-QUIP Act checks all of the boxes for smart energy, climate, and economic policy,” DeBoer said. “Installation of high performance HVAC, lights, windows, and other building components will modernize aging buildings, save businesses billions of dollars on their energy bills, create tens of thousands of jobs, and avoid carbon emissions equal to taking 22 million cars off the road for a year. The E-QUIP Act can also encourage state-of-the-art retrofits that enhance outdoor air ventilation rates — a key practice to improve a building’s health and indoor air quality, according to the best available science.”
- The Roundtable and numerous other stakeholders wrote to congressional tax writers last year about the need to establish an accelerated depreciation schedule for E-QUIP. (Coalition E-QUIP letter, May 8, 2019)
The American Council for an Energy-Efficient Economy (ACEEE) released research this week estimating the E-QUIP Act’s economic and environmental impacts would include:
- 130,000 net additional job-years
- $15 billion energy bill savings
- 100 million tons of carbon dioxide emissions avoided – or the equivalent emissions from 560,000 rail cars full of coal, or taking 22,000 cars off the road for one year. (ACEEE’s E-QUIP policy brief and fact sheet)
- “Many building owners want to make energy efficiency investments, but existing law disincentivizes them. This fix will help them upgrade from old equipment to state-of-the-art options that will reduce their energy bills while cutting carbon emissions,” said ACEEE Executive Director Steven Nadel in a press release.
- Most investments in existing commercial and multifamily buildings are currently ineligible for the immediate tax deductions available to other business investments under the 2017 Tax Cut and Jobs Act. Instead, they are subject to depreciation periods as long as 40 years, depending on the kind of building, whether the investments affect the interior or exterior, and the tax status of the owner.
- The current patchwork of depreciation periods is largely unrelated to the useful lifetime of the investments. The new E-QUIP proposal would apply uniform criteria to an elective 10-year depreciation period.
- The Roundtable and other supporters aim to undertake a coordinated advocacy effort to identify additional House sponsors for the bill, and support introduction of companion legislation in the Senate.
The E-QUIP Act will be discussed in greater detail at the “virtual” meetings of The Roundtable’s Tax Policy Advisory Committee (TPAC) and Sustainability Policy Advisory Committee (SPAC) on Jan. 27.
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