Posted by on 05.14.20

Energy efficient homes are not only better for the environment, but can also lead to cost savings for the renters who live there and the building owners. A significant but often overlooked financial incentive to energy efficient builders and contractors is the 45L tax credit. This tax credit is for owner occupied or rental dwelling buildings that meet certain energy saving standards.

Section 45L

Congress enacted the Protecting Americans from Tax Hikes (PATH) Act in 2015, which made research and development (R&D) tax credits permanent, the legislation also extended the New Energy Efficient Home Tax Credit under Code Section 45L through 2017. Section 45L was originally enacted for the same intention as the 179D tax provision though it serves homebuilders and multifamily developers.

In December 2019, the President signed a $1.4 trillion spending package covering numerous tax extenders, including the 45L Energy Efficiency Tax Credits for multifamily & residential developers which was extended through 2020.  In December, 2020, an additional Bill was enacted into law which extends the 45L credit through December 31, 2021.

Apartment developers and homebuilders are eligible for a $2,000 tax credit for each new or rehabbed energy efficient dwelling unit that is first leased or sold by the end of 2020. Taxpayers can also amend returns to claim missed tax credits from previous open tax years. The 45L tax credit can be claimed retroactively for all residential and apartment buildings completed within the last four years, and any unused credit may be carried forward for up to 20 years.

Eligibility

Property

To claim the 45L tax credit, the property must meet the following criteria:

• Built in the U.S. between January 1, 2006 through December 31, 2021
• Buildings must be three stories above grade or less to be eligible
• For single and multi-family dwelling units, the unit must consume a minimum 50% less energy to offer the same heating and cooling functions as any identical non-energy efficient residence
• Manufactured homes must reduce energy usage by at least 30%
• 10% of the energy efficiency must be derived from the building envelope
• Properties that undergo major rehabilitation and new construction can qualify for the 45L tax credit if they pass the energy audit and get certified as energy efficient
• To qualify for the 45L tax credit, the unit must be sold, leased or rented

Individuals

• A person must own and have a basis in the qualified energy efficient home during its construction to qualify as an eligible contractor with respect to the home
• A “person” can be an individual, a trust, an estate, a partnership, an association, a company or a corporation
• In addition to single-family homes, other dwellings like apartment buildings, townhouses, student housing, condominiums and assisted living facilities are eligible for the 45L tax credit – Affordable/LIHTC housing developments may also be eligible
• The qualified contractor, typically the developer, builder or homeowner - is the only person who can claim the 45L tax credit and must own the unit at the time of construction or improvement

Two Noted Differences  

There are two main differences in the energy efficiency percentage and code to compare to.

1. Manufactured Homes - The credit is $1,000 if the annual energy reduction is 30% compared to the Federal Manufactured Home Construction and Safety Standards (part 3280 of title 24, Code of Federal Regulations).
2. Constructed or Rehabilitated Homes - The credit is $2,000 if the annual energy reduction is 50% compared to the standards of chapter 4 of the 2006 International Energy Conservation Code, as such Code (including supplements) went in effect on January 1, 2006.

All 45L credits require:

• Third-party certification
• Basis reduction, dollar for dollar

Claiming a Section 45L deduction involves complex calculations and there are certain limitations. It is important that you consult with a tax advisor who has experience with 45L.

Tax Point Advisors applies our national expertise to your local projects by being more hands on and cost effective than many of our competitors. Tax Point Advisors have helped hundreds of companies successfully claim 45L energy tax benefits. On top of that, our accounting experts support your application and provide professional guidance throughout the process.

Tax Point Advisors provides R&D tax credit study services and other specialty tax services to CPA firms and their clients throughout the U.S. To learn more about the 45L tax deductions from the experts at Tax Point Advisors, contact us at (800) 260-4138, or please leave us a message below.