Energy-Efficient Tax Incentives: The Section 45L Credit

This is the first of a 3-part series focusing on energy-efficient tax incentives.

The Inflation Reduction Act of 2022 has brought energy incentives back into the spotlight, with taxpayers eager to leverage the expanded opportunities. The rules around the various incentives have significantly changed in the last two years, and therefore, a refresher is warranted.

What Is The 45L Credit?

The 45L credit is a federal tax credit that promotes the construction of energy-efficient residential dwellings. The credit is available to builders, developers, and others who build homes for sale or lease, with eligible property types including:

• Single and multi-family homes
• Assisted living facilities
• Campus residential housing
• For-lease apartment buildingsCondominiums

The credit is claimed by the entity that either owns the property or financed its construction when it was built. It may be claimed retroactively for up to 3 years.

Under the IRA, taxpayers can claim a theoretical maximum of $5,000 per eligible dwelling unit.

Dwelling units within each property are assessed individually. It’s not an “all or nothing” proposition – some units may meet the criteria, and some may not.

Legacy 45L Credit Program

Before the passing of the IRA, the 45L credit was a one-time-only incentive applicable to properties no more than three stories above grade. Taxpayers could claim $2,000 per eligible dwelling unit, and projects could be reviewed and approved after construction. The reference standard was the 2006 IECC Energy Code.

45L Credit Under The IRA

The IRA brought sweeping changes to the 45L credit, impacting the benefits, timing, and scope:

• Height Requirement Eliminated: Now, residential properties of any size may be eligible for the credit. The 45L credit may be claimed with the 179D deduction in qualifying high-rise residential buildings.
• New Standards: To qualify, taxpayers must now meet Energy Star and/or Zero Energy Ready (ZERH) Home Standards.
• Revamped Procedure: To meet Energy Star requirements, builders must apply for Certification while still in the planning stages. Other requirements include:
  • The builder must become an Energy Star Partner.
  • An Energy Consultant is required to oversee construction. The Consultant will model the project to ensure requirements are met and provide oversight and guidance throughout the project.
  • An Energy Star-Certified HERS Rater is also required, and frequent field verifications will be made during construction.
  • If an application is not filed with Energy Star up-front, the project will not qualify for the credit

Expanded Benefit (With a Caveat):

As seen on the chart below, the benefit per dwelling unit now ranges from $500 to a potential maximum of $5,000, depending on the type of property, the standard met, and whether or not Prevailing Wage Requirements (PW) were satisfied.

The PW Requirement applies to facilities for which construction began on or after 1/30/2023 and states that mechanics and laborers must be paid no less than the prevailing wages required to be paid for federal construction work. (The wage will vary based on exact job description and geographic location.)  Sufficient records must be kept.

How To Claim 45L For Multi-Family Homes

The flowchart below depicts the 45L process for multi-family homes. 

• The most significant benefit is achieved when DOE ZERH Standards are met.  
• A maximum of $2500 per dwelling unit is possible when Energy Star Standards have been met, exceeding the previous $2000/dwelling unit credit. However, this is only possible if the PW requirement is met.
• If the PW requirement is not met, the benefit per dwelling unit drops to $500, far less than the pre-IRA benefit. 

Maximize SEC. 45L Credits

The Sec. 45L credit remains impactful post-IRA, but with two major provisos:

• The Energy-Star Application must be completed before construction commences.
• If the Prevailing Wage Requirement is not met, benefits per dwelling unit will drop below pre-IRA levels.

The EisnerAmper team can guide taxpayers through this new procedure and maximize 45L benefits wherever possible.