Which tax credit or deduction is right for you?
Home builders and multi-family property developers have been very happy with the recently-enacted spending package provided in the Inflation Reduction Act (IRA) which incentivizes energy efficiency.
The Section 45L New Energy Efficient Home Credit (45L), which had previously been scheduled to expire at the end of 2021, has been extended through December 31, 2032.
What Does Section 45L Credit Entail?
45L is a section of the Internal Revenue Code that provides a tax credit of up to $2,000 for each qualified energy efficient residential dwelling unit placed in service prior to 1/1/2023, and up to $5,000 per unit for projects placed in service between 12/31/2022 and 1/1/2033.
The 45L tax credit provides 10 years of certainty (through 2032) which allows for more proactive planning.
Residential properties that potentially qualify for the credit include single family and multifamily residences. Properties placed in service after 12/31/2022 are no longer subject to the 3-story height restriction.
The Inflation Reduction Act significantly enhanced the energy efficiency incentives in the New Energy Efficient Home Credit (45L).
Benefits of Section 45L
Section 45L allows developers a means to offset the costs associated with building energy-efficient single family or multifamily properties. It provides a dollar-for-dollar offset against taxes owed or paid in the tax year in which the property is sold or leased.
Benefits of claiming 45L include:
- Increase in housing equity
- Cost-offset for purchasing energy-efficient building materials
- Increased marketability of the finished properties
- Design and build sustainably
- Minimize tax liability
- Ability for accounting/tax departments to incorporate it in their Capitalization Policy and Fixed Asset Ledgers
- Contribute to an organization’s Environmental, Social and Corporate Governance (ESG) initiatives
Who Can Benefit From 45L?
The credit is available to an eligible contractor who constructed or substantially rehabilitated an energy-efficient residential dwelling unit in the United States that was first occupied in a qualifying tax year. 45L is a general business credit subject to use after considering tax liability limitations and carryover requirements.
Beginning in 2023, developers of qualifying affordable housing projects can claim the 45L credit without lowering the eligible basis of the Low-Income Housing Tax Credit (LIHTC) credit.
What is the Study Process for the 45L Credit?
A qualified individual conducts a study of the eligible unit(s), calculating the energy savings over the applicable energy efficiency standard using Department of Energy-approved software.
A site visit (or multiple site visits) is required to verify the energy efficient components of the property. If the project is pursuing DOE Zero Energy Ready Homes (ZERH) program certification, additional reporting is required.
A Real-World Example
Eide Bailly advisors worked with a townhome complex owner to obtain the 45L tax credit. The complex was comprised of 56 units and included energy-efficient mechanical systems and building envelopes. By gathering the necessary information and completing the certification, the client received over $112,000 in credits on their current-year tax return (56 units x $2,000/unit).
Are Refunds Available for 45L?
The recent extension of the 45L tax credit ensured there was no lapse in the availability of the credit. The extension covers qualified residential dwelling units first occupied prior to January 1, 2033 and in an open tax year. Claims for refunds via amended returns should be considered for prior tax years.
Maximize All Available Business Credits and Incentives
There are many opportunities for organizations to reduce income tax liability and increase cash flow with available business credits and incentives. Exempt organizations may also benefit from “direct pay” cash refund for specific tax incentives. It’s important to identify which tax incentives are right for you and how to receive maximum benefits.
