The 45L Tax Credit: What home builders should know about this new home energy credit for taxes

In 2023, the Internal Revenue Service (IRS) provided additional guidance regarding the 45L tax credit – a new home energy-efficiency tax credit – in the Inflation Reduction Act of 2022 (IRA). The legislation expanded and extended the existing energy credit for taxes, which initially came into effect in 2006. until 2032. Now, eligible home contractors, builders, and developers who construct or reconstruct qualified new energy-efficient homes may secure a valuable feature of the 45L tax credit.

The 45L energy tax credit helps offset the cost of energy-efficient home improvement and development. Businesses in the sector can receive an energy credit for taxes, but the amount will vary depending on when the property was acquired. Read on to learn more about the 45L energy tax credit and how to use it!  

Who is eligible for the 45L energy tax credit?

This refundable energy credit for taxes aims to help stimulate the economy and foster sustainable construction. The goal is to put money back into the pockets of small businesses that operate in residential home construction. But there’s a catch – only certain types of structures are considered eligible for this attractive energy efficiency tax credit.

Energy efficient home credit guidelines

The original guidelines included a range of various types of single-family homes, multifamily properties, and manufactured residences as eligible for the 45L tax credit for energy efficiency. The 45L energy tax credit changes in 2023 expanded the list to include additional housing types not previously listed.  

Not sure if your property plans qualify for a 45L energy tax credit? Home builders, contractors, and developers can seek guidance from a Block Advisors small business tax professional to determine their eligibility for the 45L energy tax credit and other valuable self-employed tax deductions. 

How much of the 45L tax credit for energy efficiency can I claim?

This energy efficiency tax credit for properties varies widely, depending on one thing: when you bought the property. If the property was purchased between 2023 and 2032, you can claim a 45L energy tax credit between $500 and $5,000 by meeting the conditions. If you acquired your property before 2023, the maximum tax break for energy efficiency is between $1,000 and $2,000, depending on energy savings requirements being met. 

How to calculate 45L energy tax credit

Now, let’s look at how to determine how much of the 45L tax credit you can claim. Since this tax credit for energy efficiency has been around since 2006, it has some history. When the credit was reinstated and expanded for 2023-2032, calculation methods relaxed somewhat. However, homes built prior to the 2023 Inflation Reduction Act expansion must still adhere to the old guidelines. Read on for an explanation of how to calculate this energy efficiency tax credit.  

 Section 45L calculation for homes acquired between 2023 and 2032

The 45L energy tax credit amount you can claim depends on several factors, including:

• The property type (single-family, multifamily, etc.)
• Energy Star and Zero Energy Ready Home program participation – visit the Energy Star website for the minimum Energy Star-eligible programs 
• Wage requirements of contractors and builders for certain dwellings

And if:

• The dwelling is in the United States
• The contractor owns the home and has a basis in it during construction
• The property is to be sold or leased for residential use

Single-family dwellings may be able to qualify for a credit of up to $5,000 depending on the factors listed above. Energy Star-certified homes and properties qualify for a credit of $2,500. If it is a Zero Energy Ready Home, it will qualify for $5,000.

Calculating the credit for multi-family dwellings is more complicated. If the home is an Energy Star certified home, it will qualify for $500. If it is a Zero Energy Ready Home, the credit will be $1,000. Can you meet prevailing wage requirements? Then the credit increases to $2,500 and $5,000, respectively.

This topic is very nuanced and can get confusing. You can receive more guidance interpreting the rules in Section 45L in IRS Notice 2008-35. A Block Advisors small business certified tax pro can also help you understand if your property qualifies for a 45L energy tax credit or what steps you must take to ensure a future project is eligible.

Section 45L guidance for eligible properties acquired before 2023

In addition to the guidelines stated above, properties built prior to 2023 must meet a few other requirements. These are slightly different depending on if the structure is a single-family or multifamily home or if it is a manufactured home.

Certain single-family and multifamily homes must:

• Certify the home’s annual heating and cooling energy consumption is at least 50% less than that of a comparable home that meets specific energy standards.
• Have exterior building improvements that account for at least 1/5 of the reduction in energy consumption.

Certain manufactured homes must:

• Certify the home’s annual heating and cooling energy consumption is at least 30% less than that of a comparable manufactured home that meets specific energy standards.
• Have exterior building improvements that account for at least 1/3 of the energy consumption reduction.
• Meet specific federal manufactured home rules.

The credit equals $2,000 for certain single-family or multifamily homes and $1,000 for certain manufactured homes. View IRS Notice 2008-36 for more information about credit guidelines for manufactured homes.

How to claim the Section 45L credit using Form 9808

Now that you’ve read up on the types of homes that qualify for a 45L energy tax credit, how do you claim it? It’s simple. Just use IRS Tax Form 8908: Energy Efficient Home Credit to claim these tax credits for energy efficiency for the property. As always, it’s important to keep documentation to support your claim for the 45L tax credit. Home builders and contractors will ultimately report the final credit amount from Form 8908 on Form 3800: General Business Credit.

Get help filing the Section 45L tax credits for energy efficiency

At Block Advisors, we help small businesses survive and succeed. Block Advisors is here to support your small business dream with year-round services in bookkeeping, payroll, small business tax preparation, incorporation, and beneficial owner reporting so you can get back to what you love.

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