The Inflation Reduction Act, signed into law on Aug. 16, 2022, is the largest climate change spending package in United States history. It invests $369 billion toward energy security and emissions reduction through manufacturing clean energy technologies, protecting natural resources, lowering electricity costs, and offering financial incentives for green purchases and projects.
Among other measures, the Act revives the 45L federal tax credit that incentivized energy-efficient home upgrades, which initially expired at the end of 2021, and introduces modifications that will take effect in the upcoming years. Let’s take a look at the changes put in place by the Act, and the impact they will have on builders and contractors.
What is the 45L Tax Credit?
The 45L Energy Efficient Home Credit is designed to reward builders and contractors who have made energy-efficient upgrades to apartments and homes. The credit applies to single-family homes and residential buildings that have reduced their energy consumption by 50% or more, with each occupied unit of the building eligible to claim the credit.
The 45L applies to residential properties, such as apartments, single-family homes, condominiums, student housing, and assisted living homes. Qualified contractors must own the property during construction or renovation in order to claim the credit.
To learn more about the 45L Energy Efficient Home Credit and to find out if you are eligible, reach out to National Tax Group’s tax experts. Our free assessment of tax benefits will determine if you are eligible, and we can guide you through the process of claiming your credit.
Changes to the 45L Tax Credit
The original version of the 45L Tax Credit, which expired at the end of 2021, offered contractors up to $2000 for each qualifying unit. The Inflation Reduction Act retroactively extends the credit, and through the end of 2022, both the credit amount and the energy efficiency requirements remain unchanged.
Starting in 2023, the 45L tax credit will increase to $2500 for single-family and manufactured homes. To qualify, homes must meet the standards laid out in the Energy Star Residential New Construction Program or the Energy Star Manufactured Homes Program. Additionally, homes that meet the stricter standards of DOE Zero Energy Ready Home (ZERH) certification can collect a 45L tax credit of $5000.
The 45L tax credit will also change for multifamily homes in 2023. Buildings will be eligible for a $500 credit per unit if they meet the Energy Star Single Family New Homes Program requirements, and $1000 per unit if they meet the Zero Energy Ready Home requirements. The credit increases to $2500 per unit under the Energy Star requirements and $5000 per unit under the Zero Energy Ready Home requirements if all workers involved are paid the prevailing wage rates for their region and type of work, as determined by the Department of Labor.
Additionally, the Energy Star and Zero Energy Ready Home criteria allow all residential buildings to be eligible for the 45L tax credit regardless of height. Previously, buildings had to be three stories or less in order to qualify. This change allows multifamily projects four stories or taller to be eligible for both the 45L tax credit and the 179D tax deduction.
The Inflation Reduction Act currently sets the 45L tax credit to expire on December 31, 2032.
How to Claim the 45L Tax Credit
To claim the 45L tax credit under the Inflation Reduction Act, units must be certified under their corresponding Energy Star Program or the DOE Zero Energy Ready Home Program. To qualify, builders and developers will need to plan ahead and initiate certification early enough in the development process to meet all required inspections
With brand new requirements and rewards at stake, it’s important to plan your tax strategy with experienced tax experts. National Tax Group has decades of combined experience helping our clients navigate underutilized areas of the tax code, and we specialize in the 45L tax credit. Reach out to us today and find out what lucrative tax solutions you could discover.
