The Inflation Reduction Act (IRA) of 2022 greatly extended and increased the New Energy Efficient Home Credit available under IRC §45L (hereinafter, the “45L Credit”). Energy efficient home builders should be aware of the new requirements under IRC §45L in order to maximize the credit available to them. This factsheet summarizes the requirements to qualify for the 45L Credit for dwelling units acquired for use as a residence after December 31, 2022.
General Eligibility Requirements
In general, the 45L Credit is available for the taxable year for each qualified new energy efficient home which is:
- Constructed by the eligible contractor; and
- Acquired by a person from such eligible contractor for use as a residence during the taxable year.
Such acquisition by a person for use as their residence includes the first purchase or lease of such residence.
Who is an “eligible contractor”?
An eligible contractor is the person who constructed the qualified new energy efficient home. In the case of a qualified new energy efficient home which is a manufactured home, an eligible contractor is the producer of such manufactured home.
What is a “Qualified New Energy Efficient Home”?
A qualified new energy efficient home is a dwelling unit:
- Located in the United States;
- The construction of which is substantially completed after the date of the enactment of this section (August 8, 2005); and
- Which meets certain energy saving requirements.
The term “construction” includes substantial reconstruction and rehabilitation on an existing dwelling unit.
It is important to note that under the pre-IRA energy saving requirements, the 45L credit was only available to buildings no more than three stories in grade. Due to the updated energy saving requirements, residential projects of any size now qualify.
Credit Amount Available
The 45L Credit available depends upon (1) the type of home constructed, (2) whether the home meets the requirements under the applicable Energy Star program or if it also meets the requirements of the Zero Energy Ready Home (ZERH) program, and (3), for multifamily homes only, whether prevailing wage requirements are met. A summary of the credit amounts available can be seen in the below chart:
Energy Star Requirement
In order to meet Energy Star requirements, a single-family home must meet the following requirements:
- In the case of a dwelling unit acquired before January 1, 2025, the Energy Star Single-Family New Homes National Program Requirements 3.1, or in the case of a dwelling unit acquired after December 31, 2024, the Energy Star Single-Family New Homes National Program Requirements 3.2; and
- The most recent Energy Star Single-Family New Homes Program Requirements applicable to the location of such dwelling unit (as in effect on the latter of January 1, 2023, or January 1 of two calendar years prior to the date the dwelling unit was acquired).
In order to meet Energy Star requirements, a manufactured home must meet the following requirement:
- Such dwelling unit meets the most recent Energy Star Manufactured Home National program requirements as in effect on the latter of January 1, 2023, or January 1 of two calendar years prior to the date such dwelling unit is acquired.
In order to meet Energy Star requirements, a multi-family home must meet the following requirements:
- Such dwelling unit meets the most recent Energy Star Multifamily New Construction National Program Requirements (as in effect on either January 1, 2023, or January 1 of three calendar years prior to the date the dwelling was acquired, whichever is later); and
- Such dwelling unit meets the most recent Energy Star Multifamily New Construction Regional Program Requirements applicable to the location of such dwelling unit (as in effect on either January 1, 2023, or January 1 of three calendar years prior to the date the dwelling was acquired, whichever is later).
Zero Energy Ready Home (ZERH) Requirement
In order to meet the ZERH program requirements, a dwelling unit must be certified as a zero energy ready home under the zero energy ready home program of the Department of Energy as in effect on January 1, 2023 (or any successor program determined by the Secretary).
A certification shall be made in accordance with guidance prescribed by the Secretary, after consultation with the Secretary of Energy. Such guidance shall specify procedures and methods for calculating energy and cost savings.
Any certification shall be made in writing in a manner which specifies in readily verifiable fashion the energy efficient building envelope components and energy efficient heating or cooling equipment installed and their respective rated energy efficiency performance.
The most recent guidance relating to this certification requirement is contained in IRS Notice 2008-35, for builders who construct or manufacture new homes, and IRS Notice 2008-36, for builders of manufactured homes. The extent to which new and/or updated guidance will be issued in relation to this certification requirement is unknown.
DOZ does not complete these certifications in the course of our business; such certifications should be obtained from an Eligible Certifier. An Eligible Certifier is a person that is not related to the eligible contractor and has been accredited or otherwise authorized by the Residential Energy Services Network (“RESNET”) (or an equivalent rating network) to use energy performance measurement methods approved by RESNET (or the equivalent rating network). An employee or other representative of a utility or local building regulatory authority qualifies as an eligible certifier if the employee or representative has been accredited or otherwise authorized by RESNET (or an equivalent rating network) to use the approved energy performance measurement methods. See IRS Notice 2008-35.
Prevailing Wage Requirement (for Multifamily Homes only)
In order to meet the prevailing wage requirement, the eligible contractor must ensure that any laborers and mechanics employed by the eligible contractor or any contractor or subcontractor in the construction of such residence shall be paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such residence is located as most recently determined by the Secretary of Labor.
IRS Notice 2022-61, issued November 30, 2022, provided initial guidance as to satisfying the prevailing wage requirement:
- If the Secretary of Labor has published on www.sam.gov a prevailing wage determination for the geographic area and type or types of construction applicable to the facility, including all labor classifications for the construction, alteration, or repair work that will be done on the facility by laborers or mechanics, that wage determination contains the prevailing rates for the laborers or mechanics who perform work on the facility as most recently determined by the Secretary of Labor.
- In the limited circumstances where a prevailing wage is not listed on www.sam.gov, the Department of Labor, Wage and Hour Division should be contacted via email at IRAprevailingwage@dol.gov, and they should be provided with the type of facility, facility location, proposed labor classifications, proposed prevailing wage rates, job descriptions and duties, and any rationale for the proposed classifications, in order for an appropriate wage to be determined.
- Taxpayers are reminded that Treas. Reg. §1.6001-1(a) provides that any person subject to income tax must keep such permanent books of account or records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return of such tax. Treas. Reg. §1.6001-1(e) provides that the books and records required by Treas. Reg. §1.6001-1 must be retained so long as the contents thereof may become material in the administration of any internal revenue law.
Additional and/or updated guidance could be provided in the future.
Basis Adjustment and the Low-Income Housing Tax Credit (LIHTC) (IRC §42)
If the 45L Credit is claimed with respect to any property, then the basis of such property is reduced by the amount of the credit so determined.
However, this basis adjustment shall not apply for purposes of determining the adjusted basis of any building under IRC §42.
There is currently ongoing discussion as to whether or not the depreciable basis of a building under IRC §42 gets adjusted. Future IRS guidance will be important here.
Coordination with Other Credits and Deductions
Expenditures for which the Rehabilitation Credit (IRC §47) or Investment Tax Credit (ITC) (IRC §48) have been claimed are not also eligible for the 45L Credit.
However, where the respective qualification requirements are met, a project may qualify for both the 45L Credit and the IRC 179D deduction.
Extension of the Credit
Prior to the IRA, the 45L Credit was available to eligible contractors for qualified new energy efficient homes acquired before January 1, 2022. The IRA extended the 45L Credit available for qualified new energy efficient homes acquired before January 1, 2033.
Nancy Morton, CPA (Indiana & Puerto Rico)
Tax and Consulting Partner
Nancy has been in the practice of public accounting since 1986, having worked with the international accounting firms of Arthur Andersen and Deloitte & Touche prior to joining DOZ in December of 2001. Nancy is a CPA and a Chartered Global Management Accountant. Nancy has extensive experience advising and speaking on LIHTC developments.
Doug Murphy, CPA (Indiana)
Tax Senior Manager
Since beginning his career with DOZ in 2013, Doug has held numerous and varied roles in tax. In 2016, he transitioned to an in-house tax department role for a global pharmaceutical company including work with federal tax, US international tax, and tax forecasting and reporting. Doug returned to DOZ in 2021 and advises developer, manager, investor, and syndicator clients in the affordable housing industry on all matters of federal and state tax issues with an emphasis on multi-family housing projects utilizing IRC Section 42 low-income housing tax credits. Doug is a CPA and member of the Indiana State Bar Association.