The Double Dipper: Increased Energy Efficiency and Tax Credits

Take heart, all you rehabbers & builders- those projects that you invested more into for greater energy efficiency, knowing it would pay off down the road- you can also be rewarded with a tax credit for it as well. 

Like vanilla and chocolate, you can benefit from both greater energy efficiency and tax credits, the best of both worlds! 

Several energy-related tax incentives available to taxpayers have recently been re-authorized and are now available to be claimed by eligible taxpayers. This includes the Section 45L New Energy Efficient Home Credit which is available for the construction of qualified new energy-efficient homes that are leased or sold.

Intended to offset the cost of building energy-efficient homes, apartment buildings and other residential dwelling units, the credit allows the contractor who built the home to take the credit to reduce their tax liability in the year the home is first leased or sold.

So, what are we talking about? 

  • There is a tax credit known as the 45L which was put in place to encourage energy efficient building starting in 2006. However, with the most recent push for energy efficiency increase with the ‘Inflation reduction Act” this tax credit has been increased and updated. 
  • Originally having expired at the end of 2021, 45L tax credits have been retroactively extended for 2022 through the end of 2032, creating significant benefits for multifamily developers and homebuilders.
  • For 2022, both the existing energy efficiency criteria and the $2,000 tax credit per dwelling unit will remain unchanged.
  • Starting in 2023, the maximum tax credit increases to $5,000 per dwelling unit for both single-family and multifamily developments.

Who can take the credit?

  • Only the taxpayer that develops or owns the property, and then either sells, leases or uses the property for their business is eligible for the credit. Note: this does not apply to primary residences.

What do I need to do to qualify?

  • New Construction or substantial renovation projects must meet energy star standards that are substantial improvement over 2003 standards. 
  • Anyone who has tried to purchase a new water heater for a small space recently knows that the increased standards for basis building components have affected them whether they like it or not. So why not put these new standards to work for you? 
  • The energy efficiency criteria must align with Department of Energy programs for Energy Star and Zero Energy Ready Homes.

Can remodeling projects qualify?

  • Yes. Section 45L defines “new construction” as including any “substantial rehabilitation,” so renovation or upgrading projects qualify as well as brand new construction.

What about Building New?

  • For multifamily homes constructed after 2022, the Act provides a 45L tax credit of $500 when meeting the ENERGY STAR Single Family New Homes Program or $1,000 when meeting the DOE Zero Energy Ready Home requirements. If prevailing wage requirements are also satisfied, the credit for multifamily homes increases to $2,500 or $5,000, respectively.

How much is the credit?

The table below summarizes the 45L Credit rules beginning in 2023.

Screenshot 2023 08 31 at 11.34.16 AM

What qualifies for Section 45L?

  • Single family residences, apartment buildings, townhomes, condominiums, assisted living facilities, student housing and other facilities designed for individual(s) occupancy. The building must meet the appropriate requirements for energy star single-family or multifamily new homes national and local programs. An energy certification by an eligible certifier is required and involves both a field inspection and projected energy consumption analysis against a model of a comparable unit.

What are some of the basic specifications required to ensure the dwelling units are qualified?

  • In order to meet the energy-efficient standards, the units must have an air conditioner with a SEER rating of at least 13, a Heat Pump SEER rating of 13 and a Heating Seasonal Performance Factor (HSPF) of 7.7. Other criteria to consider are the R values of the roof and wall insulation, windows that have Low E ratings and have double or triple pane glass.

How do I claim the credit?

  • The credit is claimed by filing Form 8908 with the taxpayer’s either timely-filed return or on an eligible amended return. Taxpayers generally have up to three years to amend prior year returns. The credit received reduces the basis in the property, so it may impact the amount of depreciation taken against the property.

Now go enjoy your double dip and keep up the good work!

Sources

ICS-tax.com

https://ics-tax.com/news/the-inflation-reduction-act-impact-on-45l-tax-credit/#:~:text=5376%2C%20signed%20by%20President%20Biden,the%202021%20energy%20efficiency%20standards.

https://ics-tax.com/services/45l-energy-efficient-home-credit/

IRS.gov:  https://www.irs.gov/forms-pubs/about-form-8908

Claiming the Credit:

https://sourceadvisors.com/%C2%A745l-tax-credit/?gclid=CjwKCAjwkaSaBhA4EiwALBgQaIcX3-HsItaHHw5DcaRyB0LKi8_pi5qqVZlRAeukr50FQ2xCUqpaExoC0psQAvD_BwE

https://www.kbkg.com/45l

https://www.cbh.com/guide/brochures/45l-energy-efficient-home-credit-faqs/

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