The 45L Energy Efficient Home Credit has recently been updated by the Inflation Reduction Act (IRA). The credit provides a compelling incentive for any taxpayers constructing new energy-efficient homes and multifamily units. While it has been extended and updated several times in the past, it has once again been extended through 2032 and modified to provide additional dimensions of savings. This includes an increase in the amount of savings, as well as extended access to homebuilders and real estate developers. To help clients, prospects, and others, WhippleWood CPAs has provided a summary of the key details below.
Section 45L Updates
Starting in 2023, Energy Star-certified homes are eligible for a $2,500 tax credit. If the homes qualify for the Zero Energy Ready Homes (ZERH) Program, the credit is $5,000. There are now two tiers of credits available with the higher amount going to those who meet ZERH requirements. The $5,000 credit is available for single family and manufactured homes that participate in the Energy Star Residential New Construction Program or the Manufactured New Homes Program. The $1,000 credit is available for dwelling units that are part of a building and participate in the Energy Start Multifamily New Construction Program. The updated regulations applied to qualified energy efficient homes acquired between January 1, 2023, and January 1, 2033.
Benefits to Companies
Home builders and developers that build multifamily homes can get a tax credit of $500 for meeting Energy Star requirements and $1,000 for meeting ZERH requirements. However, if they also meet prevailing wage requirements, it is possible to qualify for the $2,500 and $5,000 respective credits. They are also eligible for Section 179D deductions for energy-efficient buildings. If wage requirements are met for this deduction, the incentive increases from $0.50-$1.00 per square foot to $2.50-$5.000 per square foot.
More details on wage and apprenticeship requirements can be found in IRS Notice 2022-61, which lays out the requirements for both wage levels and apprenticeship percentages. On a high level, at least 10-15% of hours should be completed by qualified apprentices, depending on when the work was started. By the beginning of 2024, the requirement will grow to 15%. Workers should also not be paid less than prevailing rates for “construction, alteration, or repair of a similar character” in the geographic area where the work is being done as determined by the Secretary of Labor.
Taxpayers, contractors, and subcontractors need to maintain records on prevailing wage rates, as well as any contractors or subcontractors on the project. Before claiming the credit, contractors need to gain certification that the unit meets 45L requirements. Form 8908 from the IRS has been updated to reflect the current record-keeping requirements.
If a unit that was sold or leased before 2023 consumes heating and cooling energy at a level that’s at least 50% below that of a comparable unit, and the energy-efficient improvements made account for at least 1/5 of the energy consumption reduction, the building qualifies for a $2,000 credit. This credit also applies to manufactured homes if they also meet the Federal Manufactured Home Construction Safety Standards (FMHCSS).
Manufactured homes that don’t have 50% energy savings but have a 30% reduction in consumption are eligible for a $1,000 credit. They also need to meet FMHCSS requirements, have improvements responsible for 1/3 of the 30% reduction, and meet Energy Star Labeled Home program requirements.
ZERH program homes sold or leased after 2022 will qualify if determined eligible through the Department of Energy. Single-family homes that are leased or sold after 2022 need to meet Energy Star requirements through one of the following:
- Energy Star Single-Family New Homes National Program
- Energy Star Single-Family New Homes Program
- Energy Star Manufactured Home National Program
- Multifamily units need to meet both regional and national Energy Star requirements to receive incentives.
45L Dollar-for-Dollar Reductions
It’s important to note that when taxpayers claim the 45L credit, they will take a dollar-for-dollar reduction based on the unit that is being leased or sold. This means the tax deduction for the cost of the unit will be reduced by the amount of the tax credit received.
The recent changes to the 45L tax credit provide additional tax saving opportunities for Denver real estate, homebuilders, and construction companies. Given the complexity of the rules, it is important to consult with a qualified tax advisor that can determine the best approach. If you have questions about the information outlined above or need assistance with an accounting or tax issue, WhippleWood CPAs can help. For additional information call 303-989-7600 or click here to contact us. We look forward to speaking with you soon.