Accounting

45L Energy Efficient Tax Credit (2024): Guide on Requirements and How To Claim

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The 45L Energy Efficient Tax Credit emerges as a critical tool for developers and homeowners, driving the creation of energy-efficient living spaces. Designed to lessen the environmental impact of new constructions and renovations, this incentive offers significant financial rewards, positioning it as a premier choice for those committed to sustainable development.

To navigate the complexities of this tax credit, Engineered Tax Services emerges as a leading expert, providing guidance to maximize benefits while ensuring compliance with the latest requirements.

In this article, we delve into the essence of the 45L Energy Efficient Tax Credit, covering its purpose, benefits, recent updates under the Inflation Reduction Act, requirements, and eligibility for buildings.

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What is the 45L Energy Efficient Tax Credit?

This tax credit promotes the construction of eco-friendly and energy-efficient homes nationwide.

The 45L Energy Efficient Tax Credit is a federal incentive aimed at promoting the construction of energy-efficient homes. This tax credit offers varying amounts, ranging from $500 to $5,000 per dwelling unit, depending on the type of home and its certification status.

To qualify for this credit, homes and apartments must be acquired after January 1, 2023, and certified to an eligible version of the relevant ENERGY STAR program. Eligible properties include single-family homes, manufactured homes, and multifamily homes that meet specific energy efficiency standards.

The minimum ENERGY STAR program versions that qualify for the credit are determined annually by the EPA. Notably, recent legislative changes through the Inflation Reduction Act of 2022 have extended and modified the 45L Credit, providing increased benefits for units sold or leased between January 1, 2023, and December 31, 2032.

Inflation Reduction Act Update

The Inflation Reduction Act of 2022 (IRA) brought significant enhancements to the 45L Tax Credit, marking a new chapter in the quest for energy-efficient housing. The maximum credit available has been increased from $2,000 to $5,000 per unit. This boost not only makes the credit more appealing but also reflects the government’s commitment to greener living solutions.

Furthermore, the introduction of labor standards and the Zero Energy Ready Home (ZERH) program, alongside the shift to ENERGY STAR for certification, signify a broader approach to energy efficiency. Importantly, the IRA removed the height limitation on multifamily buildings, expanding the tax credit’s reach and flexibility.

LIHTC Update

A noteworthy update is the integration with Low-Income Housing Tax Credits (LIHTCs), a change that amplifies the tax credit’s impact. Previously, claiming the 45L credit could reduce the adjusted basis of buildings supported by LIHTCs, potentially diminishing the benefits. However, the recent update allows for the simultaneous claiming of both 45L credits and LIHTCs on the same building, enhancing the financial viability of low-income housing projects.

What are the requirements

Before 2023, buildings needed to exceed 2006 IECC energy efficiency by 50% for the 45L credit; post-2023, they require ENERGY STAR or ZERH certification and must meet prevailing wage standards for higher credits

Pre-2023 Requirements

Before 2023, eligible buildings needed to use 50% less heating and cooling energy compared to structures meeting the 2006 International Energy Conservation Code (IECC) standards, with at least 20% of the energy savings coming from the building envelope. Independent certification by an authorized entity like the Residential Energy Services Network (RESNET) was necessary.

Requirements from 2023 Onwards

From 2023, residential and mixed-use buildings seeking the 45L tax credit must achieve ENERGY STAR or Zero Energy Ready Home (ZERH) certification and comply with U.S. EPA’s national and regional standards. For mixed-use properties, over 50% of the building’s total square footage, excluding parking garages, must be residential or common areas.

Prevailing Wage Requirements for 2023 Onwards

For the 2023 tax year and beyond, multifamily projects can qualify for higher tax credits if they meet prevailing wage requirements. Prevailing wage represents the average wage for workers in a specific area. To qualify for the bonus 45L credit rate, all labor on the project must be compensated at or above this prevailing wage.

What buildings qualify for the 45L Tax Credits?

From 2023-2032, 45L credit amounts vary between $500 and $5,000 based on compliance with specific energy standards; for pre-2023 homes, credits are $1,000 to $2,000, depending on energy efficiency and regulations adherence.

The IRS outlines specific requirements for buildings to qualify for the 45L credit, which vary based on the acquisition date of the home:

For homes acquired in 2023 through 2032

  • Credit Amounts: Ranging from $500 to $5,000, depending on compliance with:
    • ENERGY STAR program requirements.
    • Zero energy ready home program requirements.
    • Prevailing wage requirements.

For homes acquired before 2023

  • Credit Amounts: Set at $1,000 or $2,000, contingent upon:
    • Certifying reduced annual heating and cooling energy consumption by at least 50% (or 30% for certain manufactured homes) compared to a standard home, with significant contributions from building envelope improvements.
    • Adherence to federal manufactured home rules and certain ENERGY STAR requirements.
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How to claim the 45L Energy Efficient Tax Credit?

Claiming the 45L Tax Credit requires Form 8908, third-party energy certification, and allows retroactive claims with a 20-year credit carryforward.

To claim the 45L Energy Efficient Tax Credit, eligible contractors need to follow specific steps outlined in the search results:

  1. Eligibility: Contractors who build or reconstruct qualified energy-efficient homes can claim a tax credit of up to $5,000 per home.
  2. Claim Process: Contractors must use Form 8908, the Energy Efficient Home Credit form, to claim the tax credits for energy efficiency for the property. Documentation supporting the claim is essential.
  3. Certification Requirement: A detailed energy analysis certified by a third-party licensed professional is the initial step towards applying for the 45L credit. Homeowners should also have an energy efficiency overview of their current consumption before undergoing a tax credit analysis.
  4. Retroactive Claims: The 45L tax credit can be claimed retroactively for all residential and apartment buildings completed within open tax years, typically 3-4 years prior for most taxpayers. Any unused credit can be carried forward for up to 20 years.

Engineered Tax Services and 45L Credits

ETS streamlines the 45L Tax Credit process with IRS-compliant certifications and expert guidance, offering a free analysis to ensure eligibility and audit protection.

Navigating the complexities of the 45L Energy-Efficient Home Tax Credit can be daunting for many homeowners, developers, and builders, often leading to missed opportunities for significant savings. This is where Engineered Tax Services (ETS) stands out. With an in-house cadre of licensed engineers and legal experts, ETS ensures IRS-compliant certifications for residential buildings aiming for the 45L tax credit.

ETS’s certification process involves thorough evaluation and modeling by authorized certifiers recognized by the IRS, guaranteeing legitimacy and precision. Upon certification completion, clients are equipped with a comprehensive package of all essential documents needed to support the 45L tax credit claim, safeguarding against IRS audits.

Whether the project involves a single home or spans across large multifamily developments, ETS’s profound tax expertise is instrumental in guiding clients through the application process, ensuring they meet all eligibility criteria for this lucrative tax credit. Adding to their client-friendly approach, ETS offers a complimentary 45L analysis, making the initial step towards claiming the credit both accessible and inviting.

Final Thoughts

The 45L Energy-Efficient Home Tax Credit offers a significant opportunity to marry financial incentives with the pursuit of environmental sustainability in residential construction. With the complexities introduced by the Inflation Reduction Act and new prevailing wage requirements, the guidance of specialists like Engineered Tax Services is invaluable. Their expertise not only eases the claim process but ensures maximization of benefits under strict IRS criteria.

This tax credit acts as a catalyst for sustainable construction practices, encouraging the industry to prioritize energy efficiency. Leveraging the support of tax credit experts can transform a complex process into a strategic asset, facilitating the creation of environmentally friendly homes while securing financial advantages. In embracing these opportunities, developers, builders, and homeowners play a crucial role in steering the future towards sustainability.

Recommended
Partner with Engineered Tax Services and turn complex tax challenges into winning strategies.

Drive your financial goals forward with Engineered Tax Services, where professional expertise meets personalized tax solutions.

We may earn a commission if you make a purchase, at no additional cost to you.