The New 45L Tax Credit: What is it and How to Prepare
On July 27th, 2022, it was announced that the Senate struck a surprise deal on the new budget reconciliation package. The 725-page Inflation Reduction Act of 2022 includes provisions for healthcare, tax, and climate initiatives.
In order to go into effect, the bill needs to pass the Senate and the House, then the President will need to sign it. While there is a very real possibility that the bill does not make it through the entire ratification process, there is also a good chance that it gets approved and goes into effect within the next month.
The energy provisions of the bill represent some of the most significant climate change action in our generation, with a monumental $369 billion dollars attributed to climate spending.
Notably, the bill proposes:
$9 billion in consumer home energy rebate programs.
10 years of consumer tax credits to make homes energy efficient and run on clean energy, making heat pumps, rooftop solar, electric HVAC and water heaters more affordable.
$1 billion grant program to make affordable housing more energy efficient.
25C.
Credit for electrical panels.
45L Tax Credit extension and improvement.
The version of the 45L Tax Credit that our industry has leveraged for over 15 years expired on December 31, 2021, meaning that there is no active 45L Tax Credit for homes built and sold in 2022.
This bill proposes a retroactive extension of the previous version of the 45L Tax Credit through 2022 so that builders can submit 2022 homes as well.
Let’s dive into what the bill proposes for the 45L Tax Credit extension.
How long is the extension?
In Section 13304, EXTENSION, INCREASE, AND MODIFICATIONS OF NEW ENERGY EFFICIENT HOME CREDIT, it states that 45L will be extended through December 2032. This would be the largest extension that has ever been granted for 45L, as in the past Congress has typically retroactively extended 45L for just a year at a time.
What are the new credit amounts?
The proposed extension increases credit amounts for both single-family and multi-family buildings of three stories or less. At a glance, the credit amounts are as follows:
$2,500 for homes that are certified as ENERGY STAR
$5,000 for homes that are labeled as DOE Net Zero Ready
Up to $1,000 per unit in multi-family buildings
What are the modifications to the requirements for eligibility?
The bill proposes new requirements for tax credit eligibility, mainly requiring that homes meet the criteria for Energy Star 3.1, Energy Star 3.2, Energy Star Mult-family New Construction, or the DOE’s Zero Energy Ready Home specifications.
The proposed extension updates the calculation procedure to be based on well defined DOE energy standards, which ensures that the DOE can enforce quality assurance standards and proper inspection protocols. Additionally, it is based on whole home performance rather than only heating and cooling efficiency. This means that components like water heaters, lighting, appliances, etc. can now contribute to compliance.
Single Family Home Eligibility:
In the case of a single family home acquired before January 1, 2025, compliance is based on ENERGY STAR v3.1 and are eligible for $2,500. For homes acquired on or after January 1, 2025, a home is eligible if it qualifies for Energy Star v3.2 as well as the most recent Energy Star requirements applicable to the location of the home. You can review the new program requirements by state or territory here.
Additionally, single family homes are eligible for a $5,000 rebate if they meet DOE Zero Energy Ready Home requirements.
Alternatively, manufactured single-family homes qualify for the $2,500 tax credit if the meet the Energy Star Manufactured Home National program requirements as in effect on the latter of January 1, 2023, or January 1 of two calendar years prior to the date such dwelling unit 25 is acquired.
Multi-Family Home Eligibility:
Multi-family homes are eligible for a $500 rebate if they meet ENERGY STAR 3.1 as well as the most recent Energy Star requirements applicable to the location of the home. You can review the program requirements by state or territory here.
Multi-family homes are also eligible for a $1,000 credit if they meet DOE Zero Energy Ready.
Alternatively, multi-family homes are eligible for the single family tax credit levels ($2,500 or $5,000) if all laborers and mechanics employed in the construction of the homes were paid at or above the prevailing wage for similar construction in that locality.
In the past, the IRS issued this Notice (Section 4 Part 3) that says the 45L Tax Credit is only applicable to buildings that are 3 stories or less. We are not sure if this Notice will be applicable to the new tax credit. It will likely not be applicable but we have not heard one way or the other.
(1) Utilize the Energy Star program applicable to the location of the home. For homes acquired before 1/1/26 utilize the program version that was in effect for that location on January 1, 2023. For homes acquired on or after 1/1/26 use the Energy Star program version that was in effect within 2 years prior to the housing being acquired.
For homes acquired December 31, 2020 through the end of 2021, the previous version of the 45L Tax Credit will be extended to cover all of the applicable homes. The new requirements outlined above do not apply to homes acquired in this timeframe as the previous 45L requirements for eligibility and submission will apply.
What’s Next?
While the bill still needs to go through a series of votes and approvals, based on everything we have heard from our representatives in Washington D.C., it is likely that the bill will pass and the 45L Tax Credit will be implemented retroactively for all homes.
Looking ahead, construction industry stakeholders should familiarize themselves with the new 45L Tax Credit and understand both the opportunities it presents. The 10 year extension ensures that builders can count on it year over year as they improve their design specifications to become more energy efficient.
We understand that this may be a stressful time for folks in our industry. While the extension of the 45L Tax Credit is great news for our industry, incentivizing the construction of better performing homes, understanding and implementing the new criteria for eligibility may be daunting. We’re here to help. We have a suite of products and services for raters, builders, and product manufacturers that all aim to help you better understand, analyze, and strategize around the impact of major industry trends and events like this. Start strategizing with us by emailing info@ekotrope.com.
Additionally, don’t forget to sign up for our newsletter! We’ll be sharing insights regarding the current state of 45L and what you can expect in the future very soon.
