October 10, 2023

IRS Issues Guidance on Updated Section 45L Rules

For years construction companies and contractors have leveraged the Section 45L federal tax credit for the inclusion of energy-efficient systems in new residential construction. Originally passed in 2005, it permitted homebuilders to claim a federal tax credit for energy efficient home construction. Over the years the credit has been updated and modified to extend its value. Most recently, the Inflation Reduction Act (IRA) extended and enhanced the credit to allow homebuilders who construct, reconstruct, or rehabilitate energy efficient homes to receive a credit up to $5,000.  Unfortunately, many home builders have not claimed the credit because of a lack of detailed guidance from the IRS.  The good news is the agency recently released Notice 2023-65 which provides the long-awaited details. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

Section 45L – IRA Update Overview

The Inflation Reduction Act made two important changes to the 45L credit. First, it retroactively extended the credit for qualified new energy efficient homes acquired after December 31, 2021, and on or before December 31, 2022. Second, there were changes to the available credit amount, new energy saving requirements, and added certain prevailing wage requirements.

Eligible Contractors

An eligible contractor includes any homebuilder that constructs, or substantially reconstructs and rehabilitates, a qualified new energy home located in the U.S. In addition, the contractor must own the home during construction, and must sell or lease it to a person to use as a primary residence.  

Available Credit Amount – Before 2023

For homes acquired prior to 2023, the credit amount can vary between $1,000 – $2,000 depending on the standard satisfied, including:

• The home has an annual level of heating and cooling energy consumption that is at least 50% (or 30% for manufactured homes) less than that of a comparable home. It is important to note that the building envelope component improvements must account for at least 1/5 of the reduction.
• Meeting certain federal manufactured home rules.

Available Credit Amounts – 2023 & Later

The credit amount varies from $5,000 to $500 per dwelling unit based on the eligible federal energy efficient program. Below is a breakdown of the available credits, including:

• A $5,000 credit is available for any dwelling unit eligible to participate in the Energy Star Residential New Construction Program or the Energy Star Manufactured New Homes Program while meeting other requirements.
• A $2,500 credit is available for any dwelling unit eligible to participate in the Energy Star Residential New Construction Program or the Energy Star Manufactured New Home Program while meeting other requirements.
• A $1,000 credit is available for any dwelling until that is part of a building eligible to participate in the Energy Star Multifamily New Construction Program while meeting other requirements.
• A $500 credit is available for any dwelling unit that is part of a building eligible to participate in the Energy Star Multifamily New Construction Program while meeting other requirements.

Certification Requirements

To claim the credit not only must certain documentation be retained, but a formal certification must be completed. According to regulations, an energy analysis certification must be provided by a qualified third party that is RESNET certified (or an equivalent rating network).

Contact Us

The recently published guidance is welcome news for homebuilders and construction companies eligible to claim the credit. Those interested in determining if they qualify should consult with a trusted tax advisor to determine the potential savings amount. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.