It is important for taxpayers to be aware of the retroactive changes made to the Energy Efficient Home Tax Credit and the new standards for the tax credit beginning in 2023. The Internal Revenue Code (IRC) Section 45L credit was extended, increased and modified under the Inflation Reduction Act (IRA) of 2022, which was signed into law by President Joe Biden on August 16, 2022.
WHAT IS THE ENERGY-EFFICIENT HOME CREDIT?
The Energy Efficient Home Credit incentivizes the construction of new energy-efficient homes by way of a per-dwelling-unit tax credit. This tax credit is available to the contractor, or to the taxpayer who has acquired this property from the contractor.
The Section 45L tax credit has been available since 2006, although it was set to expire at the end of 2021. The existing credit will be extended through 2022 and reformed under the Inflation Reduction Act, which goes into effect in 2023. The time to apply for this credit has been extended to 2032, covering a 10-year period.
GHJ Thoughts: Taxpayers can now claim the credit for tax year 2022 under the pre-IRA rules. In addition, taxpayers have the opportunity to file amended tax returns for any open tax years to claim the tax credit under the prior rules. Starting in tax year 2023, the credit is significantly enhanced by the IRA. The credit's 10-year extension provides predictability and may now be utilized for tax planning in the future.
WHO IS ELIGIBLE TO CLAIM THE CREDIT?
Apartment building complex, condo, single-family and multi-family real estate developers can get incentives to conserve energy in newly constructed dwellings by way of a per-dwelling-unit tax credit, which is available under Section 45L.
GHJ Thoughts: It is important to note that the 45L credit can also be claimed on leased units. So, for a landlord/developer in a flow-thru structure, the utilization of the credit depends on each individual partner’s tax situation. Passive or non-passive treatment of the activity and whether there is a loss from the activity (such as accelerated depreciation from a cost segregation study on the real property generating these credits) will impact the analysis and utilization of the credits.
WHAT ARE THE BENEFITS OF THE 45L TAX CREDIT?
CREDIT MAXIMUM AND DEVELOPMENT SIZE
The maximum credit offered to contractors is enhanced by the statute. With the inclusion of the Zero Energy Ready Homes certification and a prevailing wage option, the tax credit will rise from $2,000 per unit to $5,000 in 2023. In addition, the tax credit will no longer be limited to low-rise residential developments in 2023.
The following is an example of the anticipated benefits based on the number of qualifying dwelling units:
- $200,000 in 45L Tax Credits: 100 qualified units x $2,000 retroactively applied from 2020 to 2022.
- $500,000 in 45L Tax Credits: 100 qualified units x $5,000 applied from 2023 through the end of 2032.
CERTIFICATION REQUIREMENTS
To conform with these programs, the statute increases the energy-efficiency standards and testing requirements. Because of the inspections required during the construction phase, builders and developers must start and prepare for the certification at an earlier point in the development process.
GHJ Thoughts: Other planning considerations to keep in mind include the new Department of Energy (DOE) Energy Star single-family and multi-family new construction national and regional initiatives, as well as the Zero Energy Ready Home Program. In addition, Section 45L may now be used in conjunction with the energy-efficient commercial building deduction under Section 179D for residential rental developments, where permitted.
Please contact GHJ’s Tax Services Team to learn more about the Section 45L tax credit.
