Section 45L was originally introduced in the Federal Energy Policy Act of 2005. Since then it has expired and been extended multiple times, leaving those that use the credit in a constant bout of anxiety and subject to last-minute changes. However, in August of 2022, President Biden signed the Inflation Reduction Act into law. This act included an 11-year retroactive extension and expansion of the 45L credit, also known as the energy-efficient home improvement credit until December 31, 2032.
Pre-December 2022
The 45L credit has been available to dwelling units built by eligible contractors and then acquired or leased to an eligible contractor. To receive the credit said contractor must show that in building the dwelling unit there was a 50% reduction in energy use compared to the building standards. If the qualifications are met then each dwelling unit is eligible for a $2,000 federal tax credit. Manufactured homes must show a 30% reduction in energy use and can qualify for a federal tax credit of up to $1,000.
Under current rules, an eligible contractor is anyone who has a basis in the building during construction, which could include the constructor of the building unit or manufactured home, or an owner who hired a contractor to construct a dwelling unit to be leased or sold.
A dwelling unit must meet the following criteria:
- Is located in the United States.
- Is initially sold or leased before the end of 2022.
- Substantially built after December 31, 2005.
- Is three stories above grade or less, and:
- The unit has an energy consumption reduction that is 50% or more than a comparable dwelling unit that meets certain energy requirements in accordance with the 2006 International Energy Conservation Code Residential Energy Efficiency standards.
Post-December 2022
On January 1, 2023, the credits adjusted to $500, $1,000, $2,500, or $5,000 depending on the criteria met. The definition of eligible contractor remains the same, as does dwelling units with the exception that it can now include buildings over three stories in height above grade.
The credit has been increased to $2,500 for single-family and manufactured homes if it meets the requirements enumerated in the Energy Star program. If it meets the Zero Energy Ready Home U.S. Department of Energy (DOE) standard credit increases to $5,000. Both standards require higher energy savings than previously so taxpayers should review these changes with their advisors.
The credit has been increased to $2,500 for multi-family homes if it meets the requirements enumerated in the Energy Star program. If it meets the Zero Energy Ready Home U.S. Department of Energy (DOE) standard credit increases to $1,000. Both of these amounts could increase to up to $2,500 and $5,000 respectively per unit, if prevailing wage standards 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 you believe you may qualify, even retroactively, reach out to us at the National Tax Group. Our team of experts is ready to help you and your advisors determine your eligibility and ensure that you are maximizing your tax savings.
