The new energy efficient home credit, as defined by Internal Revenue Code (IRC) Section 45L, was extended, increased, and modified under the Inflation Reduction Act of 2022.
The act was signed by President Joe Biden on August 16, 2022.
In general, the Section 45L tax credit provides incentives for residential homebuilders and multifamily developers to reduce energy consumption in newly constructed residences by offering a per dwelling unit tax credit.
Modifications to Section 45L
The Section 45L tax credit has existed since 2006 and most recently expired at the end of 2021. However, the Inflation Reduction Act retroactively extends the existing credit through 2022 and modifies it starting in 2023.
The applicable period to claim the credit is now extended for 10 years through 2032.
You can still claim the existing Section 45L tax credit through 2022 and also in prior years by amending any open year tax returns, typically three years prior. The 10-year extension of the credit provides stability and can now be used for tax planning strategies looking forward.
The act increases the maximum credit provided to contractors. Originally $2,000 per unit, it’s now increased to $5,000 per unit with the addition of the Zero Energy Ready Homes certification and a prevailing wage option.
Another aspect to plan around is the new Department of Energy (DOE) Energy Star Single-Family New Homes & Multifamily New Construction National and Regional programs and/or the Zero Energy Ready Home Program building certifications.
The act changes the energy-efficiency criteria and testing requirements to align with these programs. To qualify, builders and developers will need to initiate and plan for the certification at an earlier stage in the development process because of inspections needed during the construction phase.
The new DOE programs don’t have a height restriction; therefore, the existing three-story or less requirement is no longer applicable. It’s now open to any size development.
Combinations with Other Deductions and Incentives
The Section 45L credit can now be used in combination with the Section 179D energy-efficient commercial building deduction for residential rental developments, where applicable.
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In addition to the Section 45L tax credit, property owners have a multitude of tax incentives to consider, including the Section 179D energy-efficient building tax deduction and the accelerated depreciation of assets with a cost segregation study.
To learn more about how provisions in the Inflation Reduction Act of 2022 could impact your business, contact your Moss Adams professional. You can also see the most updated tax planning strategies related to these changes on our Tax Planning Resources page.