Inflation Reduction Act – Section 45L

On August 16, 2022, the Inflation Reduction Act was signed into law by President Biden. The Inflation Reduction Act provides for substantial enhancements and improvements to two existing tax incentives, Section 45L and Section 179D. The changes are expected to yield significant benefits. We will cover the Inflation Reduction Act’s modifications to Section 45L this week and will follow up with another post next week on Section 179D.

The Section 45L credit for new energy-efficient homes expired on December 31, 2021. Prior to its expiration and before the passage of the Inflation Reduction Act, the Section 45L new energy-efficient home credit was a $2,000 tax credit for each energy-efficient dwelling unit from an “eligible contractor.” An eligible contractor was defined as a person who constructed, reconstructed, or rehabilitated the qualified new energy-efficient home, or was the producer of an energy-efficient manufactured home.

The qualified new energy-efficient home must have:

• Been acquired from an eligible contractor, and
• For use as a residence during the taxable year.

In order to qualify for the Section 45L new energy-efficient home credit, the energy-efficient dwelling unit was required to be 50% more efficient than a standard dwelling unit designed in accordance with the 2006 International Energy Conservation Code standards. The modeling for the energy-efficient dwelling unit had to have been completed by a third-party eligible certifier, as defined by IRS Notice 2008-35. There was no partial credit if the 50% threshold was not met.

The Inflation Reduction Act extends the tax credit through December 31, 2032. For 2022, both the existing energy efficiency and the $2,000 tax credit per dwelling unit for new residential property that is sold or leased will remain unchanged.

Beginning in 2023, the credit will increase to $2,500 per unit, but will be decrease to $500 per unit for multifamily homes. These homes will need to be modeled against the more stringent Energy Star Residential New Construction program or the Energy Star Manufactured New Homes program.

Other important changes to Section 45L include:

• An increased credit of $5,000 per unit for dwelling units that meet the more stringent Zero Energy Ready Home program, according to the Department of Energy as in effect on January 1, 2023 (or any successor program determined by the Secretary).
• An increased credit of $1,000 per unit if multifamily homes meet the requirements of the Zero Energy Ready Home program.
• If the taxpayer confirms that employees of contractors and subcontractors are paid prevailing wages, the credit for multifamily units is increased to $2,500 (or $5,000 in the case of a Zero Energy Ready multifamily unit).
• All residential developments are now potentially eligible, whereas under previous law, only low-rise residential developments were eligible. Multifamily projects that are four stories or taller are now eligible for the Section 45L new energy-efficient home credit.

Many thanks to Stan Babicz and Caleb Solley for their contributions to this post.