By Jennifer French, CPA

The IRS recently updated its guidance for the 45L Energy Efficient Homes Credit. 45L is available to eligible construction contractors in varying amounts from $500 to $5,000 per unit depending on the type of residence and the home’s energy efficiency. Single-family homes, manufactured homes, and multi-family dwellings, like apartments, qualify.

In this article:

• Current 45L framework
• Updated Definitions
• Revised Certification Requirements
• Clarified Substantiation for 45L

45L Framework

The Energy Efficient Home Credit, first introduced in 2005, has been amended ten times to either extend it, update it, or retroactively reinstate it. Its parameters were simpler in that credits were available for either $1,000 or $2,000 per unit.

When the Inflation Reduction Act (IRA) passed in August 2022, it changed 45L in several ways, such as:

• Changing the applicable amount of the credit,
• Setting new energy efficiency requirements,
• Adding an exception to the required basis adjustment, and
• Mandating new prevailing wage requirements to earn a higher credit amount.

A single multi-family dwelling can qualify for a $500 tax credit if it meets ENERGY STAR® Multifamily certification standards. This is lower than the previous credit, but there are opportunities to net a higher amount, as noted below.

• $1,000 for each multi-family dwelling that meets Zero Energy Ready Home requirements.
• $2,500 for each unit that meets ENERGY STAR® requirements and utilizes prevailing wage rules.
• $5,000 for each unit that meets Zero Energy Ready Home requirements and prevailing wage rules.
  • Note that prevailing wage only applies to multi-family dwellings placed in service in 2023 and after.

Recent Changes to 45L

Contractors now have more direction on how to interpret and apply 45L, thanks to updated requirements in Notice 2023-65.

More specifically, the IRS clarified certain definitions, certification for Zero Energy Ready, and how to substantiate the credit.

Definitions

Definition: An eligible contractor is a person who built, owned, and maintained basis in the home during construction. New construction or substantial reconstruction can both qualify.

For manufactured homes, an eligible contractor must have produced, owned, and maintained basis in it during production.

Definition: Acquired can mean purchased or leased for use as a residence.

Definition: The contractor may lease the home for use as a residence; a home that the contractor retains for use as a residence is ineligible.

Manufactured homes can be acquired directly or indirectly from a contractor, provided they are eventually sold or leased to a buyer for use as a primary residence.

Definition: The United States includes the 50 states and District of Columbia. U.S. territories – Puerto Rico, U.S. Virgin Islands, Guam, and the Northern Mariana Islands – do not qualify. Hover, homes in U.S. territories are still eligible to earn ENERGY STAR certification.

Certifications

Contractors must secure the certification first before claiming the 45L credit.

A home can meet the requirements for 45L if it is certified under the minimum Energy Star or Zero Energy Ready Home program requirements. The Department of Energy (DoE) will maintain an updated program list on its website.

Contractors will need to ensure they are using the correct version of Energy Star or Zero Energy Ready Home requirements for 45L. For example, in 2023, U.S. homes can be certified under MFNC National v1.0 program requirements. 45L requires that homes are instead certified under MFNC National v1.1 program requirements. Missing this small but important distinction would still mean energy savings for the home, but the contractor would miss out on the tax incentives under 45L.

Certification requirements that were in place for homes acquired in 2022 and before no longer apply in 2023 and beyond. This Insights article provides a point of reference for previous 45L rules.

Substantiation

To verify the 45L credit, a contractor must keep certain records. These include:

• Energy Star or Zero Energy Ready certification and date
• Qualified home’s address and location in the U.S.
• Taxpayer’s status as an eligible contractor
• Documents that demonstrate when the home was acquired for use as a residence, including who acquired it
• Prevailing wage requirements, if applicable

If a contractor sells a manufactured home to a dealer, the dealer must provide a written statement. The statement must include:

• Contact information for the dealer, including name, phone number, address, and any intermediaries involved in the home sale
• The date the manufactured home was sold
• Acknowledgement that the dealer delivered the home to an eligible location within the U.S.
• A written understanding that the dealer has no knowledge of any information that suggests the purchaser will not use the home as anything other than a residence.
• A declaration that must be written as follows:
  • “Under penalties of perjury, I declare that, to the best of my knowledge and belief, the facts presented with respect to this sale transaction are true, correct, and complete.”

With more options to claim 45L and over a longer time span – through December 31, 2032 – contractors can obtain significant benefits from energy efficient buildings.

Construction contractors who are considering using the 45L green tax credit as part of an overall tax strategy can contact Jennifer French, Construction & Real Estate Team Leader, for additional guidance.