Section 45L Tax Credit Update
Over the last 16 years, homebuilders and multifamily developers, along with their tax advisors, have been navigating the rules of the Section 45L credit under constant uncertainty regarding its future application. Originally implemented as part of the Federal Energy Policy Act of 2005, the credit was never made permanent and has expired and been extended multiple times since its enactment. Fortunately for taxpayers benefiting from this credit, the days of last-minute government action are over … for now.
On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022. This legislation included an 11-year retroactive extension and expansion of the §45L tax credit, which last expired on December 31, 2021, until December 31, 2032. This long-term extension will allow taxpayers and their advisors to perform the work necessary and claim these credits with confidence for years to come. Below are some general background notes and key provisions included in this new legislation.
General Information & Rules – Units Initially Leased or Sold Before December 31, 2022
Since 2006, the §45L credit has been available for dwelling units built by an eligible contractor and then acquired or leased from such an eligible contractor. Under the existing rules, to receive a credit, the eligible contractor must show a 50% reduction in energy use as compared to a set building standard, where one-fifth of the reduction comes from items such as exterior walls, floors, windows/doors, and roofing. If all the qualifications are met, each dwelling unit is eligible for a $2,000 federal tax credit. Or, in the case of manufactured homes, a $1,000 per dwelling unit tax credit is available, if it meets a 30% reduction in energy use.
Under current rules, an “eligible contractor” is a person who has basis in the building during construction. This could include the person constructing the new energy-efficient dwelling unit (or manufactured home producer), or an owner who hired a third-party contractor to construct a dwelling unit to be leased or sold.
A dwelling unit qualifies under the existing rules if it meets the following criteria:
- Is located in the United States;
- Substantially built after December 31, 2005;
- Is initially sold or leased before the end of 2022;
- Is three stories above grade or less; and
- The dwelling unit has an energy consumption reduction that is 50% or more than a comparable dwelling unit that meets certain energy requirements in accordance with 2006 International Energy Conservation Code Residential Energy Efficiency standards.
General Information & Rules – Units Initially Leased or Sold Between January 1, 2023 & December 31, 2032
Starting on January 1, 2023, the credit amounts adjusted to $500, $1,000, $2,500, or $5,000, depending on the criteria met. The definition for “eligible contractor” remains the same, but the dwelling unit definition now could include buildings over three stories in height above grade. There also have been multiple changes to the energy reduction qualifications and standards.
For both single-family and manufactured homes, the credit has been increased to $2,500 if the dwelling unit meets ratings for the ENERGY STAR® Single-Family New Homes program. In addition, the credit increases to $5,000 if the dwelling unit meets the Zero Energy Ready Home U.S. Department of Energy (DOE) standard. Both standards require greater energy savings compared to the prior standards, and taxpayers should review these closely with their advisors to assess their eligibility.
For multifamily homes, the credit per dwelling unit is decreasing to $500 if they meet the ENERGY STAR Multifamily certification standards listed by location during 2023 and National Version 1.1 beginning in 2024. The credit will increase to $1,000 if the building is rated Zero Energy Ready Home by the DOE. In addition, these amounts could potentially increase further per unit if the prevailing wage requirements are met.
To meet the prevailing wage requirements, a taxpayer will need to ensure that all laborers, contractors, and subcontractors are paid during the construction of the energy project and within a 10-year period, beginning on the date the project was originally placed into service or an alteration or repair has occurred, at a rate not less than the local prevailing rates for construction, alteration, or repair and set by the U.S. Department of Labor.
If the prevailing wage requirements are met, an ENERGY STAR-rated multifamily home would qualify for a $2,500 credit per dwelling unit, increasing to a $5,000 credit if the Zero Energy Ready Home standards are met.
The following chart provides a summary of the various qualifications and credit levels available for single-family, multifamily, and manufactured homes.
Not only is this credit available for current and future tax years, but there also could be an opportunity to claim these credits for prior tax periods that are still open under the IRS statute of limitation.
If you are a homebuilder, multifamily developer, or manufactured home producer and believe you qualify as an eligible contractor for a residential property, let our team of engineers and professionals help assess your eligibility, take a look at the buildings in question, and provide you with an estimate of the amount of potential credit.
If you have any questions, please reach out to a professional at FORVIS or submit the Contact Us form below.