The Energy-Efficient Home Credit — more commonly known as the section 45L tax credit — is a temporary incentive provision that was added to the Internal Revenue Code in 2005.
Over the years, the provision has repeatedly expired and been retroactively extended. As is often the case, history has once again repeated itself. Scheduled to expire on December 31, 2020, the section 45L tax credit was extended through December 31, 2021 by the Consolidated Appropriations Act, 2021.
Key elements of the section 45L tax credit
Section 45L provides an income tax credit to homebuilders and multifamily residential developers to encourage them to continue to invest in building more energy-efficient properties. Qualifying buildings include single-family homes, multifamily residential properties that are at fewer than four stories above grade, and manufactured homes. (A similar provision, section 179D, is available for multifamily residential properties that are four or more stories above grade.)
Eligible contractors who construct or substantially renovate qualifying properties can claim a $2,000 credit per nonmanufactured unit and $1,000 or $2,000 per manufactured dwelling unit, depending upon the level of energy savings achieved.
The credit is claimed on the contractor’s tax return for the year the unit is sold or leased. Because there is no maximum credit cap imposed by section 45L, the potential tax savings can be significant. Contractors who built or renovated qualifying properties that were placed in service in prior tax years but did not claim the credit may be able to amend their tax returns for those prior years in order to retroactively claim the credit. If the contractor is a BBA partnership, the missed credits can be claimed in the current tax year.
Despite the fact that section 45L is a tax provision, understanding and determining whether a property qualifies for the credit requires a contractor or engineer, because the rules reference building codes and standards:
- Nonmanufactured properties must provide a level of heating and cooling energy consumption at least 50% below that of a comparable baseline property that is built in the same climate zone and in accordance with the minimum standards of Chapter 4 of the 2004 Supplement to the 2003 IECC. A reduction of at least 10% must be attributable to the building’s envelope components — walls, floor, roof, windows, etc. The heating and cooling equipment must also meet the latest minimum DOE efficiency standards under the National Appliance Energy Conservation Act of 1987 in effect at the time of completion of construction.
- Manufactured homes must conform to the Federal Manufactured Home Construction and Safety Standards and also either 1) show a reduction in annual heating and cooling costs in accordance with Chapter 4 of the 2003 IECC, with a reduction of at least 10% attributable to building envelope component improvements, or 2) meet requirements established by the EPA’s Energy Start standards under the Labeled Home Program in effect on the date that the home’s construction is substantially completed. If the reduction in annual heating and cooling costs is at least 30%, a $1,000 credit can be claimed. If the reduction is at least 50%, a $2,000 credit can be claimed.
How can Wipfli help?
Wipfli offers a complimentary preliminary analysis to determine whether your building qualifies for the section 45L tax credit. If it does, we can also provide the necessary certification study. If you have questions or want further details, we can help with that as well. Contact us to get started.