In recent years, many home developers and manufacturers have consistently welcomed and adopted countless energy-efficient practices. As technology continues to evolve, we are seeing firsthand the benefits that occur when building with sustainability and environmental efficiency at the forefront. So much so, that the IRS has recently, under Notice 2023-65, unveiled Section 45L. Under Section 45L, citizens can benefit from expanded tax credit opportunities designed to reward energy-conscious building practices.
The recently amended provision (under the Inflation Reduction Act or IRA) allows eligible contractors who construct or substantially reconstruct and rehabilitate qualified new energy-efficient homes a tax credit of up to $5,000 per home. Like most tax breaks and benefits, the actual dollar amount is determined by a number of eligibility requirements including (but not limited to):
- The type of home
- The home’s energy efficiency
- The prevailing wage requirements with respect to multifamily dwelling units.
Who Qualifies: Outlining Eligibility
As previously mentioned, eligible contractors must construct or substantially reconstruct and rehabilitate a qualified new energy-efficient home located within the United States. As of now, those living abroad in U.S. territories are not eligible. The contractor must also own the home and have a basis in it throughout the construction period. Once they are ready to sell the home, it must be sold or leased to a person for the purpose of residency. In summation, the home must not be rendered and used for commercial ventures.
Requirements and Credit Amounts for 2023 and Thereafter
Homes must be eligible to participate in certain Energy Star programs, they must also meet applicable energy-saving requirements based on home type. For homes acquired within the 2023 year (through 2032) the credit amount ranges from a minimum of $500 to a maximum of $5,500. The amount received will depend on the certification achieved, and the standards met. These standards include (but are not limited to):
- Energy Star program requirements
- Zero Energy Ready Home program requirements
- And prevailing wage requirements (this pertains to multifamily dwelling units only)
Energy Saving Requirements
The energy-saving requirements incorporate various Energy Star and certain Zero Energy Ready Home program requirements. The Energy Star certifications include single-family homes, manufactured homes, and Multifamily homes. Again, the amount received in the credit will depend heavily on the prevailing wage requirements. Further, note that a larger tax credit is also available for homes that are certified DOE’s Zero Energy Ready Homes or ZERH.
For homes acquired in 2023 or after, one should refer to the tables provided by Energy Star on their website. Which will provide more information regarding the minimum qualifications under Section 45L. Furthermore, The Department of Energy has compiled a list of DOE Zero Energy Ready Home (ZEHR) program requirements.
The aforementioned webpage further breaks down requirements based on the type of home in question such as version 1, single-family version 2, manufactured homes, and multifamily version 2 homes. Remember that the first step to building a ZEHR-certified home begins when you register as a partner.
Finally, all ZEHR homes will require third-party verification. This certification must be administered and approved by an appropriate third-party participant who can successfully verify that all eligibility requirements have been met.
Previous Requirements and Credit Amounts Predating 2023
Although Section 45L has recently been amended to account for new eligibility requirements, homes that were acquired prior to 2023 may still yield potential breaks. The credit amounts for homes predating 2023 range from $1,000 to $2,000 depending on the requirements met, which include:
- A certification that the home has an annual level of heating and cooling energy consumption that is at least 50% (or 30% for certain manufactured homes) less than that of a comparable home that meets certain energy standards. For instance, building envelope component improvements must be about for at least 1/5 (or 1/3 for certain manufactured homes) of the reduction.
- And: meeting certain federal manufactured home rules.
How To Properly Claim the Credit
Determining eligibility for a tax credit or break is one challenge. Taking the time to claim the credit and ensure you have gone through the proper channels to receive it is another. Before you even go about the process of filling out relevant documentation, double-check to ensure that you are eligible. This will help protect you against the massive labor that accompanies compiling documents and filling out forms. Undergoing all of the necessary legwork only to ultimately be rejected can be avoided if you double-check your eligibility.
Furthermore, interpreting Section 45L can be a challenge (more on that to come) however Notice 2008-35 can be of help by providing clarification. Once you’ve determined your eligibility you can use Form 8908 for your application which will be attached to your tax return.
To ensure the best possible outcomes the IRS encourages eligible contractors to practice thoughtful and organized recordkeeping of all documents which will be required to support a claim for the Section 45L credit.
Decrease Your Workload and Achieve Peace of Mind by Enlisting Professional Help
If you have been reading this blog post and scratching your head the entire time, don’t worry, you’re not alone. Taxes can confuse the best of us, and even longstanding credits and breaks are constantly subjected to changes and amendments on a yearly basis, making it hard to follow their trajectories. Reading through the eligibility requirements alone can be a time-consuming fete, add in all the other components, and suddenly it can feel like a lot of work for not a lot of benefit.
Fortunately, reputable tax and bookkeeping Charlotte NC professionals like our staff at McGrant Tax & Bookkeeping in Charlotte, North Carolina, specialize in decoding complicated tax notices all day, every day. We can guide you through the entire process from start to finish, ensuring that everything moves forward smoothly and without error. Over the years we have helped countless clients receive notable tax credits and breaks, all while offering peace of mind in the process. For more information regarding Section 45L and all of the necessary requirements involved, contact McGrant Tax & Bookkeeping today. Our team of renowned tax and Charlotte bookkeeping professionals is here to help alleviate the stresses and concerns you’re harboring while simultaneously ensuring you receive the credits and breaks you deserve. Please feel free to contact us today at any of our two locations or visit our website https://mcgranttax.com and book an online or physical appointment.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her attorney, business advisor, or tax advisor concerning matters referenced in this post. McGrant Tax and Bookkeeping assumes no liability for actions taken in reliance upon the information contained herein.