The 45L Tax Credit is an extension of the New Energy Efficient Home Tax Credit that had originally been established in 2005 as part of that year’s federal Energy Policy Act. The original tax credits expired in 2014, but they were extended until the end of 2016.
The 45L provides eligible contractors with a $2,000 tax credit for each energy efficient home that implements the required measures to save power consumption. The 45L tax credit can be applied to single-family homes or multi-family homes including apartments, condominiums, townhouses, assisted living facilities and student housing. If used for a multi-family building, the home credit applies to each qualifying unit within that building.
Homeowners are not eligible for the credit; one of the qualification criteria is that the owner must sell or lease the building or unit. The 45L tax credit can provide substantial savings as seen in the below examples:
Case Study A
Apartment complex with 83 units, with all units being leased in 2015. All units in the building qualified for the tax credit.
- Tax credit ($2,000 x 83 units) $166,000
- Project certification fee ($400 x 83 units) $33,200
- Net benefit $132,800
Case study B
Multi-family apartment with four stories and 106 units. It was fully leased in 2015, but the lowest level was below grade parking. In this case, 85 percent (or 90 out of 106) units fit the needed criteria to benefit from the 45L tax credit.
- Tax credit ($2,000 x 90 units) $180,000
- Project certification fee ($400 x 90 units) $36,000
- Net benefit $144,000
- The project must be three stories or less above ground (not including below-grade parking);
- The project must be built on the territory of the United States, and it must meet construction standards based on those set by the 2006 International Energy Conservation Code (IECC)*;
- The project has to be completed between August 8, 2005, and December 31, 2016. Construction can include “substantial” rehabilitation and reconstruction;
- Energy efficient features include: wall insulation R-13+, roof insulation R-38+, foundations and slabs with extra insulation, vinyl low thermal emissivity windows, double or triple pane windows, insulated exterior doors, reflective roofing materials, air conditioning with SEER (Seasonal Energy Efficiency Rating) of 13+, gas furnaces with at least 80 percent efficiency, or radiant heating systems.
Before claiming the energy efficient home credit, the contractor must have his property or unit certified by a qualified expert. An eligible certifier must have accreditation or authorization from the Residential Energy Services Network (RESNET) or an equivalent rating network. He cannot be affiliated with the contractor in any way.
The specialist visits the site and conducts a variety of tests and computer modeling to determine the energy efficiency of the unit or building. If the property meets the required standards, the expert will authorize a certification package that includes a declaration under penalties of perjury that he believes the facts presented in the certification are true, correct and complete. The applicant for certification pays a fee that is usually based on the number of units he owns.
Who Is An Eligible Contractor?
The qualified contractor may earn the 45L tax credit during the year the certified units are sold or leased. To qualify as an eligible contractor, the person or company that constructed or rehabilitated the project must also own it, expressing the explicit intention of renting or selling the property.
A third party contractor (architect or engineer) hired by the owner to work on the project does not qualify for the tax credit even if they do the bulk of the construction work. The eligible contractor must own the property, and he must have paid a particular amount to hire a specialized third party to construct the building or implement the energy efficiency measures.
*What is the IECC?
The IECC is a building code that was first established by the International Code Council (ICC) in 2000. It sets minimum requirements for commercial and residential buildings which are planning to be certified as energy efficient. The residential section of the code applies only to buildings that are no more than three stories above grade. The IECC covers new construction, remodeling, additions, repairs, and window replacement.
Ever since 2006, the IECC has divided the United States into eight climate zones, with Zone 1 being the warmest (southern Florida) and Zone 8 being the coldest (parts of Alaska). The Code’s requirements vary according to the climate zone. For example, a building in Zone 7 will need more insulation than one in Zone 2. The required R-values, or measurements of the effectiveness of insulation, will, therefore, be higher for the building in Zone 7.
How can Walker Reid Strategies help?
Walker Reid Strategies can assist clients with both Specialty Tax and Energy Efficiency Services. Our engineers can perform the site audits and energy models needed to enable a customer to qualify for the 45L tax incentive. Our CPAs can help clients fill out the required paperwork to get the tax credit.
- The 45L loan is an IRC Section 38 business credit;
- General business credits can not be used to offset the Alternative Minimum Tax (AMT);
- The 45L credit reduces the taxpayer's costs of installing green technology;
- The eligible contractor claims the credit on the tax return for the year the dwelling units are sold or leased;
If you believe you have a project that might be suitable for the 45L tax credit, submit a plan qualification form to find out. Contact our specialists and we will assist you with expertise throughout the entire process.