IRS Releases 45L Guidance
On September 27, 2023, the IRS released heavily anticipated guidance on the 45L Energy Efficient Home Credit. This notice clarifies many vital details, including who is eligible for the credit, how to determine the amount, and energy and certification requirements.
Prior to the passing of the Inflation Reduction Act of 2022 (IRA), the 45L Tax Credit was based on a comparison to the 2006 International Energy Conservation Code (IECC). If an applicable new home reduced energy consumption by 50 percent of the IECC guidelines, each new residence would be eligible for a credit of up to $2,000. This meant a qualifying apartment complex with 100 units could receive a tax credit of up to $200,000.
The tax credit changed drastically under the IRA. For single-family homes, the credit increases from $2,000 to $2,500. In some cases, the credit can be as high as $5,000 per home. However, the base credit for multifamily drops from $2,000 to only $500. For multifamily homes, the credit can increase to $2,500 if the property is constructed meeting prevailing wage provisions.
The most significant change was not the amount of the credit but the eligibility requirements. Under previous rules, the building was compared to the IECC and then approved by an eligible certifier. This meant a contractor could wait until a building was completed to start the qualification process. Under the IRA, the qualification is not based on the IECC but on Energy Star compliance. Specifically, the law states that a dwelling unit must meet Energy Star requirements to qualify.
Under this guidance, the IRS confirms that a building must be fully Energy Star certified to meet the new requirements. Unfortunately, an Energy Star certification is difficult to achieve if the property was not designed and built for Energy Star from the beginning, meaning that many developers who have utilized 45L Tax Credits in the past may not qualify for properties completed in 2023.
McGuire Sponsel will continue to unpack these regulations and provide guidance. Feel free to reach out to our team with any questions.
David McGuire is a leading expert on cost segregation, fixed assets and depreciation law and a co-founder of McGuire Sponsel.
McGuire is an expert on for how tax law affects depreciation. His knowledge in determining asset costs and classifications has held up against IRS scrutiny and has built the firm into a trusted industry partner.