Recently Expanded Section 45L Tax Credit: An Energy-Efficiency Incentive for Homebuilders
Amongst available tax incentives for sustainable building practices, the Section 45L tax credit of the Internal Revenue Code (IRC) stands out as a significant provision aimed at promoting energy efficiency in residential construction. The Internal Revenue Service (IRS) expanded Section 45L to provide even greater benefits for homebuilders prioritizing energy efficiency in the United States.
What is Section 45L?
The Section 45L credit is a provision under the IRC that offers a tax credit to homebuilders for constructing energy-efficient homes. Specifically, it provides a credit of up to $2,000 per qualified home that meets certain energy-saving standards. This incentive is designed to encourage builders to incorporate advanced energy-saving features in new residential construction, thereby reducing overall energy consumption and lowering greenhouse gas emissions.
The IRS announced an expansion of the energy-efficient tax credit under Section 45L, which would now allow builders to claim a credit of up to $5,000 per qualified home, a significant increase from the previous $2,000 limit. This expanded credit applies to homes constructed between Jan. 1, 2023, and Dec. 31, 2024.
The expanded credit aims to further incentivize energy-efficient building practices by offering a more substantial financial benefit. This adjustment reflects the ongoing commitment to advancing energy conservation and supporting sustainable development in residential construction.
Who Qualifies for the Section 45L Tax Credit?
To qualify for the Section 45L tax credit, the homebuilder must meet specific criteria:
- Eligible Homebuilders: The credit is available to builders of new homes, which means companies or individuals involved in the construction of single-family homes, duplexes, triplexes and quadplexes.
- Energy Saving Requirements: The homes must meet or exceed the energy-saving standards, which include Energy Star program requirements, Zero Energy Home program requirements and prevailing wage requirements specifically for multifamily dwelling units.
- Certification: To claim the credit, builders must obtain certification from a qualified third party that the home meets the required energy efficiency criteria. The home most have an annual level of heating and cooling energy consumption at least 50 percent less than standard homes, or 30 percent for some manufactured homes. This certification ensures that the home’s energy performance has been evaluated according to the standards.
What are the Benefits of Section 45L?
The Section 45L tax credit, especially with its recent expansion, offers several notable benefits:
- Increased Financial Incentives: Builders can now receive a credit of up to $5,000 for each qualified home, a significant increase from the previous $2,000. This expanded credit can considerably offset construction costs, making it even more attractive to incorporate energy-efficient features.
- Market Advantage: Homes built to higher energy efficiency standards are often more attractive to buyers. The benefits of reduced utility bills and increased comfort can make these homes more desirable in the market.
- Economic Growth: The provision can stimulate economic activity within the construction industry by promoting the adoption of advanced building technologies and creating jobs related to energy-efficient home construction.
How Can Builders Apply for the Credit?
To take advantage of the Section 45L tax credit, builders should follow these steps:
- Ensure Eligibility: Confirm that the home meets the required energy efficiency standards and obtain necessary certifications from a qualified third party. The IRS has provided guidance for understanding and applying Section 45L in in Notice 2023-65.
- Documentation: Maintain detailed records and documentation to support the claim, including the incorporation of program requirements for Energy Star and Zero Energy Ready Home.
- Claim the Credit: The credit is claimed using Form 8908, Energy Efficient Home Credit. It’s advisable to work with a tax professional who can ensure that all requirements are met and that the credit is correctly applied.
Windham Brannon Can Help with Section 45L
Section 45L represents a valuable tool in promoting energy-efficient residential construction. With the current credit amount of up to $5,000 per home, this provision provides a substantial financial incentive for builders to adopt sustainable practices. For builders and homeowners alike, understanding and leveraging this provision can lead to cost savings, enhanced marketability, and a positive environmental impact. As with any tax-related matter, consult with your Windham Brannon tax provider to navigate the specifics of Section 45L and work toward compliance with all relevant regulations. For more information about Section 45L for your homebuilding projects, contact Micah Greenberger.
