As pressure mounts for the healthcare industry to reduce emissions, investments in sustainable construction projects have ramped up, and healthcare organizations have indicated a strong commitment to environmental sustainability and decarbonization goals. Many health systems are already taking steps to reduce their environmental impact – implementing policies and procedures to cut waste and water consumption, incorporating green building features, safeguarding facilities against extreme weather damage, and transitioning to renewable energy – with plans to expand these efforts further. While healthcare organizations are focused on incorporating renewable energy projects into their revitalization plans, they may not be paying attention to something that could potentially save them millions of dollars: the Inflation Reduction Act (IRA).
The IRA is the largest energy incentive effort in U.S. history and provides unique opportunities in the healthcare industry for both not-for-profits and tax-paying entities. For the first time, not-for-profit healthcare organizations can obtain the equivalent of a tax credit in the form of a direct payment from the IRS for qualifying clean energy or efficiency projects. Qualifying projects receive a 6% base credit, but if organizations comply with other bonus credits, like prevailing wage and apprenticeship (PW&A), and domestic content, and energy community, they could unlock more extensive tax credits and offset as much as 50% or more of the qualifying project costs.
While the IRA clean energy credits present great opportunities for healthcare organizations to offset costs and meet sustainability goals, navigating compliance requirements can be complex. Here is a breakdown of what you need to know to maximize the benefits.
Who is eligible and what types of projects qualify?
Hospitals and health systems, senior living facilities and other healthcare provider organizations throughout the country may benefit from credits for facilities currently under construction, projects about to start construction, or planned future construction.
Tax credits can apply to projects beginning before January 2025 that involve:
- Combined heat and power property
- Solar panels
- Electrochromic glass
- Energy efficient buildings
- Waste energy recovery property
- Ground or ground water to thermal energy property
- Electric vehicle (EV) charging stations
- Energy storage technology (i.e., batteries)
Taking advantage of Bonus Credits
Most projects that qualify for the baseline IRA-related clean energy credit are also entitled to, or eligible to apply for, one or more of the following bonus credits:
Prevailing Wage &Apprenticeship
Eligible projects that comply with IRA PW&A requirements are eligible to receive a 5x multiplier on their base credit, the single largest bonus credit offered under the IRA. However, complying with PW&A requirements to receive the full 30% tax credit is complex. Under the IRA, ensuring compliance with PW&A standards involves managing three levels of apprenticeship requirements and facing penalties for noncompliance. To navigate the opportunities and manage the complexities of PW&A compliance, a best practice is to seek external tax credit compliance assistance.
Domestic Content
Projects that meet PW&A requirements are also eligible to receive a 5x multiplier of the domestic content credit, allowing project owners to claim up to an additional 10% on their tax credits, by sourcing materials that meet the domestic content requirements. This means that 100% of structural steel and iron are domestically sourced, manufacturing processes take place in the U.S., and all product components of the manufactured product are of U.S. origin.
Ensuring compliance is paramount, given the substantial value of the PW&A and domestic content bonus credits. Project owners must ensure contracts with general contractors include these provisions and that they are sourcing materials from manufacturers capable of supplying domestically manufactured products to meet these crucial thresholds. Keep in mind that, it is the owner of the energy property project that is responsible to the IRS for compliance with these requirements.
Energy Community
Projects within an energy community may also qualify for 5x multiplier of the energy community bonus credit if PW&A is met. The IRS has clear, detailed requirements for what constitutes an energy community. Essentially, for a project to qualify for an energy community bonus, it must be in one of three areas: a brownfield site, in or adjacent to a census area that has had a coal mine close, or in a region whose economy is or has been overly reliant on the fossil fuel economy.
Recommended Actions
For healthcare organizations looking to position themselves best to benefit from these credits, the following are some recommended actions you can take now
- Evaluate your organization’s deferred maintenance plan for projects – prior, current, or future – that incorporate energy efficiency, renewable energy, or other eligible components under the IRA.
- Understand the value of direct pay tax credits, particularly for tax-exempt organizations that were not previously eligible for credits prior to the IRA.
- Refresh feasibility assessments on potential projects and put a development plan in place for those you wish to move forward.
- Work with the facilities team to create a funding strategy – both related to the project financing and how these credits tie into your organization’s environmental, social and governance (ESG)-related programs.
The devil is in the details: important considerations
All these credits can be stacked upon each other to offset up to 50-70% of the project cost. However, there are a few key considerations healthcare organizations need to be aware of when seeking IRA-related energy project credits.
The first consideration applies to healthcare organizations using tax-exempt funding for energy-related projects. These organizations must deduct 15% of their eligible IRA-related tax credits. For this reason, seeking knowledgeable capital planning is advisable.
Another important consideration is understanding whether qualifying projects also qualify for assistance under state-level programs and incentives. Having insight on what incentives are available beyond the IRA-related energy credits and knowing the interplay between the various incentives is key to maximizing the benefits for your projects.
Additional considerations center on timing – understanding when you can claim credits and plan your project financing and timing accordingly. From a timing perspective, it is also worth noting that currently projects are evaluated for eligibility of certain credits based on the “green” technology they are implementing. Projects beginning construction after January 1, 2025, will instead qualify for credits based on the carbon emissions they are reducing, making the timing of when a project begins a significant change with many nuanced implications.
As is with all tax-related credits and incentives, the devil truly is in the details. It is always advisable to work with a knowledgeable advisor to assist with capital planning and ensure your project receives the maximum IRA credits.
Laura Cataldo
Laura Cataldo is a director with Baker Tilly’s development and community advisory practice. She works with real estate and construction firms of all sizes to evaluate business practices and assist with management challenges. Having worked in the construction and real estate industry for more than 25 years, Laura offers a depth of experience working with management teams to improve profitability and succeed in the changing marketplace. She has a deep understanding of construction industry labor and workforce matters and is recognized nationally for her work and thought leadership on these issues.
