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The federal tax credit for home builders and developers, Section 45L, was increased, updated, and made permanent as part of the Inflation Reduction Act. The Section 45L federal tax credit has provided a compelling tax incentive for the construction of new, energy-efficient homes. Typically claimed by construction and real estate companies, it features a $2,000 per dwelling unit credit when specific energy efficiency standards are met. It’s available for new multi-family construction (apartments and condos), single-family homes, and other residential dwellings. However, important changes are coming in 2023.
As part of the Inflation Reduction Act, Section 45L was modified, updated, and extended through 2032. Starting January 1, 2023, new homes certified under the Energy Star Residential New Construction sold or rented after December 31, 2022, are eligible for a $2,500 tax credit. This increases to $5,000 if certified under the Zero Energy Ready Homes Program (ZER). These changes allow builders to achieve higher savings based on the level of efficiency reached. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key details below.
Section 45L Background
45L has been part of the U.S. tax code since 2006 but has often been subject to expirations and retroactive extensions. That uncertainty made it harder for taxpayers to plan for the future. The Inflation Reduction Act (the “Act”) extended 45L from expiring at the end of 2021 and expanded it through 2032, with potentially higher tax benefits if certain energy reduction thresholds are met.
Historically, to qualify for 45L, contractors, developers, or builders had to achieve at least a 50 percent reduction in energy use against comparable building standards. One-fifth of the energy savings had to come from the building’s exterior – its windows, doors, walls, and/or roof. The taxpayer who could claim 45L must have had a basis in the building during construction. While it usually applies to contractors and developers, the building’s owner could qualify if they hired a third-party contractor to build it.
Through 2022, eligible projects must be in the U.S., built in 2006 or later, sold or leased before the end of the year, and be no more than three stories tall. Eligible buildings include apartments, student housing, senior living, condominiums, affordable housing projects, and townhomes. Energy savings are determined using a third-party analysis compared to the 2006 International Energy Conservation Code Residential Energy Efficiency standards.
For eligible buildings leased or sold by December 31, 2022, 45L is equal to a $2,000 per-unit tax credit. Manufactured homes can qualify for a lower credit of $1,000 per unit if they meet at least a 30 percent reduction in energy use.
It’s not just new construction that may qualify, as building retrofits can also achieve the energy savings required by 45L.
Beginning January 1, 2023, taxpayers must meet stricter energy standards to qualify for 45L. If they do, they’re eligible for a much higher credit.
45L Tax Credit Changes Beginning in 2023
Changes to 45L for 2023 through 2032 involve both credit amounts and energy standards. Higher credit amounts will be tied to energy savings and prevailing wage requirements. The definition of an eligible taxpayer remains the same. Notably, buildings more than three stories tall can qualify for 45L, too.
- $2,500: ENERGY STAR® Single-Family New Homes
- $5,000: Zero Energy Ready Home U.S. Department of Energy (DOE)
- Single-family homes built in 2023 or 2024 must meet Version 3.1 of the Single-Family New Homes Program; Version 3.2 applies to homes built in 2025 and after.
- $2,500: ENERGY STAR
- $5,000: Zero Energy Ready Home
- Manufactured homes must meet the Manufactured Home National Program requirements that are in effect as of January 1, 2023, or January 1, two years before the home is built or acquired, whichever is later.
- $500: ENERGY STAR Multi-family certification standards
- $1,000: Zero Energy Ready Home
- $2,500: ENERGY STAR plus prevailing wage
- $5,000: Zero Energy plus prevailing wage
Prevailing wage requirements apply to multi-family dwellings beginning in 2023.
45L Prevailing Wage and Apprenticeship Rules
Prevailing wage and apprenticeship requirements depend on when construction began. Prevailing wage means the minimum hourly rate for union laborers or mechanics plus any fringe benefits. Prevailing wage rates can be found in the Wage and Hour Division (WHD) of the Department of Labor (DOL). Rates will vary depending on location and worker classification. If prevailing wage rates are unavailable, the contractor, builder, or developer must directly request a wage determination from WHD.
The rules require that all project laborers, contractors, and subcontractors be paid at least the local prevailing wage rate from the time the project is in construction and for five years after it was placed into service. The beginning effective date is January 30, 2023. Construction either begins when the physical work starts (the physical work test) or when five percent or more of the project cost has been incurred.
Taxpayers must also keep documentation, including how they determined the wage rate, which laborers received prevailing wage and their classification, how many hours they worked, and the wages they were paid.
Apprenticeship hours function differently. To qualify, the apprentice must be in a Registered Apprenticeship program that meets DOL requirements.
If building construction began in 2022, the project must involve at least ten percent of qualified apprenticeship hours. If construction starts in 2023, the requirement is 12.5 percent. Projects that begin in 2024 will be subject to 15 percent apprenticeship hours if the taxpayer intends to qualify for the maximum available 45L credit.
Sometimes, a registered apprentice won’t be available. Taxpayers still must demonstrate a good faith effort to request a registered apprentice, even if that request ends in a program’s unresponsiveness or denial.
45L in 2023 and Beyond
The 45L tax credit can be carried forward up to 20 years, so even if it doesn’t produce a tax benefit in the current year, it’s still beneficial. The credit can also be combined with other energy-efficient incentives, like 179D, which can further offset the cost of a clean energy building project.
The savings opportunities available through the Section 45L credit will continue and expand in the coming years. Since eligibility and other rules are changing, it is important to consult an advisor who can guide you through the process. If you have questions about the information outlined above or need assistance with an accounting or tax issue, JLK Rosenberger can help. For additional information, call 949-860-9902 or click here to contact us. We look forward to speaking with you soon.