The 45L tax credit has been available to eligible contractors since 2006. However, this energy-efficient incentive is still under-publicized and thus under-utilized among affordable housing developers, contractors, investors, and builders.
The credit can deliver some significant benefits, including an increase in housing equity, a cost-offset for the purchase of energy-efficient building materials and an increased marketability of the finished units. In this post, learn more about the benefits and mechanics of the 45L energy efficient tax credit.
45L Tax Credit Basics
The 45L tax credit is designed to serve one purpose. The incentive provided is to encourage the construction of dwellings that are more energy efficient.
For the tax credit, a “dwelling” is defined by the IRS as follows:
– It must be located within the 50 U.S. states.
– It must be substantially finished on or after August 8, 2005 (this also applies to remodels and updates).
– It meets the minimum energy efficiency requirements to qualify for the tax credit.
– It has been acquired (sold, rented) before December 2016 (previously 2008, and then 2014).
A dwelling or unit must be comprised of at least the minimum of the following components:
– Occupancy by an individual or family.
– One or more bedrooms for sleeping.
– A kitchen for cooking.
– Living amenities (bathroom, et al).
Many different buildings may qualify for the tax credit, including each of the following that are three stories or less above grade:
– Student housing.
– Assisted living facility.
– Apartment complex.
– Condominium complex.
– Single-family homes.
45L Energy Efficiency Requirements
The minimum energy efficiency requirements must be certified before the tax credit can be awarded.
The current IRS-mandated minimum requirements for the energy efficiency of a dwelling are as follows:
– The dwelling must consume a minimum of 50 percent less energy to perform the same heating and cooling function as any identical non-energy efficient dwelling (reference point: International Energy Conservation Code of 2006).
– The building envelope itself must deliver a 10 percent reduction in energy use for the purposes of heating and cooling as any identical non-energy efficient dwelling.
These requirements speak directly to the types and quality of building materials used in the construction, remodeling and/or upgrade of any potentially eligible dwelling.
The Financial Incentive
For those dwellings that meet the IRS-mandated requirements for the energy efficiency tax credit, the incentive is a $2,000 tax credit for any certified eligible dwelling.
The tax credit is per eligible unit, which means that for multi-unit buildings, it would potentially be available for each certified dwelling within that building.
In addition to the tax credit itself, the eligible party (developer, contractor, investor, builder) may elect to pass along the savings as a way to offset project overages, losses in other areas or additional taxes or fees in other areas.
Qualifying Energy Efficiency Upgrades
It must be noted that the materials and supplies required to qualify a building/dwelling for the tax credit can be pricier than non-compliant materials and supplies. This must be weighed into any decision to build towards application of the tax credit.
Some examples of materials and supplies that could qualify for the tax credit include these:
– R-13 – R-19+ wall insulation.
– R-38+ roof insulation.
– Double-pane or triple-pane window glass.
– Windows that are vinyl and rated Low E.
– HVAC units with a rating of SEER 13+.
– Hydronic heat systems.
– 80+ percent efficiency furnace systems (gas).
– Foundations/slabs with extra insulation.
– Exterior doors with extra insulation.
– Reflective roofing.
Obtaining Dwelling Certification for Tax Purposes
All potentially eligible dwellings/units must receive certification before the eligible party can file for the tax credit. The selected certifier must have received authorization from the Residential Energy Services Network (RESNET) or a similar entity recognized to have certification authority in this area by the IRS. The selected certifier must not be personally related to the applicant.
The certifier must visit the site to conduct tests of energy efficiency and then assemble the findings into a “certification package.” The certifier must provide his/her name, address, phone number and a signed statement of certification that all information is true and correct along with the package.
Certification fees are typically assessed on a per dwelling or unit basis (rather than on a per-building basis).
Applying for the Tax Credit
The IRS does not currently require the applicant to submit the certification package along with the tax forms during tax filing. But the applicant must retain a copy of all certification documents with his/her copies of filed tax returns for the appropriate legally-required length of time should this additional information be requested by the IRS.
The tax credit is considered an Internal Revenue Code (IRC) Section 38 business tax credit and in nearly all cases cannot be used as an offset credit against the alternative minimum tax (AMT). However, the 45L credit does reduce the depreciable basis for the taxpayer and must be claimed in the same year the dwelling/unit is sold.
Any renovated, remodeled or upgraded dwelling/unit may be re-evaluated for certification and application of the tax credit as appropriate.
Determining Eligibility for the Tax Credit
In situations where many parties participate in construction, remodeling, renovation and upgrades to a building and/or dwelling, it can be a challenge to determine which party is the eligible party to file for the tax credit.
For IRS purposes, any contractor that wishes to file for the tax credit must have had ownership of and interest in the relevant building/dwelling during the time of its construction to qualify to apply for the tax credit. Subcontractors hired by the owner during that time are not eligible to apply for the tax credit.
For IRS filing questions, it is always best to consult a certified professional accountant.