The Inflation Reduction Act (IRA), successfully passed last fall, is a shot in the arm for those looking for financial help with energy-efficiency measures. Co-ops and condos are included in the IRA’s goody bag of tax credits, but figuring out how to take advantage of what is being offered can be tricky.
There are three ways to take advantage of IRA’s financial help: direct pay, passing credits through to shareholders, and transferring credits to an outside vendor. Direct pay lets the taxpayer treat the credit like a tax refund — the government will send a check for the amount of the credit. It’s the most convenient method, but so far is restricted to tax-exempt entities, state and local governments, and Indian tribal governments. However, co-ops or condos that invest in carbon capture (see p. 16 for how this technology is being used today in New York City), clean hydrogen production or advanced manufacturing production may qualify for this method.
Federal tax is not generally paid by co-ops or condos, so they can’t use this benefit. But the credits can be passed along to shareholders and unit-owners. For co-ops, accountants will determine the amount of credit per share each shareholder is entitled to and will include that information on the annual tax-benefits letter, a process similar to the property tax abatement. Residents can then deduct that amount from their income taxes as they see fit. There is a similar process in a condominium.
Where this will become an issue is if the co-op or condo chooses to implement an assessment to help pay for the energy improvement. Because personal circumstances can mean that some residents don’t pay income taxes, they won’t be able to apply the tax credit, and assessing for it means some residents will end up with a loss, while others break even.
“The people who don’t get the tax benefit are the ones who have the least amount of money,” says Stephen Beer, a partner at the accounting firm Czarnowski & Beer. “But when you have a mix of owners who are on fixed incomes and high-income people, what percentage of that credit do you choose if you’re going to assess?”
A newer and somewhat untested third option may turn out to be the easiest and most equitable: transfers. The idea is that co-ops and condos can sell the federal tax credits that are unusable to third-party vendors (called tax equity investors) via a special broker, who can then redeem the credits and return the money to the board — minus a small percentage for the vendor and the broker.
“It’s a new system,” says Nicholas C. Mowbray, counsel at the law firm BakerHostetler. “You’ve never really been able to do this in the past.” The transferability of credits could start in the first quarter of 2023, but as of late January the Internal Revenue Service had not issued guidance on what the actual process would be. Questions about timelines for repayment, additional considerations for condominiums, fraud protections and whether the outside organizations would have to register with the IRS or the Treasury Department remain unanswered.
This is new territory, and boards will want to consult with their property managers, energy consultants, accountants and legal counsel before claiming any benefits. These credits may not come easy, but they are out there for the savvy.