One of the efforts that governments are making to contribute to sustainable human activities is offering tax incentives in the construction sector. The 45L Tax Credit is one of the incentives that developers can capitalize on when constructing. This tax credit provides $2000 for every unit of a newly built property or a building that meets the certified standards after rehabilitation. The incentive applies to owner-occupied and rentals that have attained a particular level of energy efficiency. Constructors can calm the credit if their project saves at least 50% of energy in cooling and heating as a similar home built in compliance with the International Energy Conservation Code (2006). The energy savings in the building envelope must count for at least 10%. The provisions of this tax credit are mentioned in the IRC § 45L with further guidance in the IRS Notice 2006-27.
The building industry is responsible for a big portion of the carbon footprint in the environment. Putting up a building requires the use of different raw materials like bricks, tiles, wood, and metal that come from natural resources. As more people invest in real estate, the adverse effects keep rising. Besides construction, running a home takes up a lot of energy, especially for heating and cooling the environment. Developers must find ways to reduce the power consumption while still providing homes that are safe per the federal standards. The tax credit also provides a further $1000 for manufactured homes that adhere to specific lower standards. Note that the $2,000 is the maximum amount, but the credit could be less than that, depending on various aspects that arise during the cost benefit analysis.
Eligibility for Credit
There are requirements that buildings should meet to be eligible for the 45L tax credit. For one, a building must have energy efficiency rates that don’t exceed those of the national average. A point to note is that a majority of buildings constructed in recent years are likely to meet these standards because of the current energy saving norms. For this reason, it is advisable for a developer to get evaluations for buildings constructed in the past four years to verify the energy efficiency. Certified engineers are responsible for conducting the costs segregation studies to determine the eligibility of a particular development.
The other requirement is that a property should be no less than three stories. Note that a single-story parking garage or a below ground floor qualify as one floor, so a developer should consider that when concussing or rehabilitating an existing property. Another qualifier is that there must be energy savings features included in the property, like R-value doors, windows, HVAC systems, insulation, and roofing. Residential properties that make the cut for the credit include townhouses, condominium units, detached houses, apartments, and single-family homes.
Importance of 45L Tax Credit
Builders who implement the significant efficiencies and are eligible for the tax credit can use it to offset the costs. Constructing a building using energy efficiency material and appliances is not a low-cost affair, and that is why some builders have been afraid to implement the standards. However, these efficiencies pay for themselves. In fact, a developer does not have to incur huge costs when implementing such features. For instance, switching a SEER 13.5 HVAC system to a SEER 15 will provide sufficient savings for cooling and heating.
The ability of the tax credit to absorb some of the building costs means that developers can now provide Energy Star homes at affordable prices. The need for more environmentally conscious constructions is not just a burden for the builder but buyers as well. A home that offers a highly efficient HVAC system, superior quality insulation and an efficient home envelope is a better pick any day. It has not always been facile, though to meet the asking prices of such properties what with the expensive cost of building materials and appliances. The 45L tax credit has changed that.
Seeing as the tax credit applies to every single unit, an investor can rely on it to get funding to build additional units. The provisions in 45L require that a unit must be sold or leased before the credit is obtained. A developer can lease part of the building and then use the tax credit to expand it for more businesses.
The construction industry is benefitting from this tax credit in the form of higher standards of building. As more investors and developers seek to capitalize on the 45L credit, the quality of construction keeps going up. One plus point of this is the high value of property. Consumers across the globe are seeking more ways to save energy and living in an energy efficient home provides that in plenty. Potential buyers are willing to spend a few more on green homes if it means making even higher savings on annual energy costs.
LIHTC projects can also take advantage of the 45L tax credit to generate additional equity. Low-income housing projects have limits on how much tax credits they can get. The limited partner investor can get the credit provided they shell out the required cash to meet requirements.
The professional responsible for the certification process must be an independent third party who has no ties to the project in any capacity. We have engineers who can conduct the evaluation and sign off on the certification. You then get the necessary documentation to present to the IRS for the tax credit. By having an engineer take a look at your building plans before you even start the construction, you can ensure that your structure meets the necessary standards. If you are rehabilitating, then a certified engineer can point out the adjustments that would earn you the tax credit.
At Walker Reid, we have other professionals besides certification engineers who can help you understand the 45L tax credit better. You can work with Specialty Tax CPAs and Tax Energy Incentive Advisers to understand the tax credit and how to make the most of it. We also use proprietary software that is IRS-compliant to conduct evaluations of tax credits. Contact us for further details and we will guide you through this process.