Everyone wins when new developments or substantial renovations to existing homes prioritize energy efficiency. Society benefits, residents pay lower bills, and developers and builders are rewarded with a tax credit.
However, these benefits can go unrealized if eligible contractors are unaware of their entitlements.
Section 45L tax credits are cooling energy consumption by incentivizing sustainable construction. To take full advantage of them, builders need to know who qualifies, how the program works, key requirements, and how to claim the credit—all of which we’ll explain below.
What is the 45L tax credit?
The 45L tax credit is a federal incentive that provides builders and developers a tax credit of up to $5,000 per qualifying energy-efficient dwelling unit.
Under § 45L, newly constructed or significantly renovated residential buildings that meet the Energy Star residential or Zero Energy Ready Home (ZERH) standards and certain other legal requirements are eligible for credits ranging from $500 to $5,000.
Per an Internal Revenue Service (IRS) press release about 45L, the credit was updated in 2023 under the Inflation Reduction Act (IRA). This increased the total possible benefit for homes acquired from 2023 to 2032 to the current amount. Before the IRA, the total credit maximum was $2,000, contingent on similar requirements.
Who qualifies for the 45L tax credit?
As with all tax credits for small businesses, there are strict guidelines on which entities are eligible for the benefit. Put simply, this incentive applies to builders and developers who construct or significantly renovate energy-efficient homes (residential properties).
In particular, the projects eligible for energy-efficient home credits are:
- Energy Star single-family homes.
- Energy Star multifamily buildings.
- Energy Star manufactured homes.
The 45L tax credit applies to business entities buying, building, and/or renovating homes—not private homeowners. In cases where the business hires third-party contractors, they (and any contractors they hire, by extension) are not eligible.
Key energy efficiency requirements
As noted, homes must meet certain energy-saving requirements to qualify for the 45L tax credit.
In particular, two primary standards can apply:
- The Energy Star Program Requirements for Single-Family New Homes (SFNH), Multifamily New Construction (MFNC), and Manufactured New Homes (MH).
- See Energy Star’s guidance on minimum eligible versions for each type, broken down by state, in their respective guides (SFNH, MFNC, and MH).
- The Department of Energy’s (DOE) ZERH for 45L program includes both Energy Star certification and some expanded ZERH requirements
The specifications for both standards cover climate zone control (e.g., building envelope, windows, and doors), compliant lighting, appliances, and ductwork, indoor air quality assurances, renewable readiness, and more.
How much is the 45L tax credit worth?
The 45L tax credit is worth a maximum of $5,000 for builders and developers, assuming they meet the requirements. However, the actual amounts can vary.
According to the DOE, single-family homes and manufactured homes are eligible for $2,500 under Energy Star and $5,000 under ZERH. Multifamily homes that meet the prevailing wage requirement (see below) are eligible for $2,500 and $5,000 per unit, respectively, under each program. However, multifamily constructions without prevailing wage protections are only eligible for $500 or $1,000 per unit.
The Prevailing Wage Requirement imposed by the IRS ensures that developers pay laborers fair wages when working on eligible homes. For 45L, this means paying competitive rates indexed against comparable projects and hiring apprentices from registered programs for a pro-rated allotment of hours.
This means that a business that does its i’s and crosses its t’s when building a 50-unit building could earn itself a tax credit worth up to $250,000.
How to claim the 45L tax credit
To take full advantage of the 45L tax credit, simply follow the steps below.
Step 1: Conduct an energy efficiency certification
Hire a qualified third-party energy rater or certifier to verify that the home meets Energy Star or ZERH standards. This includes onsite inspections and advanced energy modeling projections.
If you’re seeking the highest possible benefits, be careful about hiring to comply with prevailing wages.
Step 2: Obtain the proper documentation
When preparing to claim the 45L tax credit, you’ll need to maintain records to substantiate claims about efficiency, prevailing wage, and more. Original documents related to the overall construction project, energy audits, tax credit calculations, and salary and benefits benchmarking should be retained in the event of an IRS audit.
Step 3: File for the credit
Ultimately, you’ll claim your 45L tax credit by filing Form 8908 with the IRS. The prior years’ tax returns can also be amended if the benefit would apply to work completed in the past.
Working with a tax professional or tax preparation outsourcing provider like Archer Lewis is the best way to streamline the process for swift, accurate processing.
Common questions and misconceptions (FAQs)
Make your claim with confidence by familiarizing yourself with the answers to these common 45L questions.
1. Can I claim the 45L tax credit retroactively for past projects?
Yes, 45L tax credits can be applied retroactively. However, this is only possible if they were missed on prior tax documents. In addition, it can be more challenging to file for and receive benefits post-facto; careful year-end tax planning mitigates this risk.
2. Can I claim both the 45L tax credit and other energy incentives?
Yes, developers can still qualify for and receive other tax incentives related to energy, whether or not they’ve claimed the 45L credit—it doesn’t preclude other benefits.
3. Does the 45L tax credit apply only to new construction?
The 45L tax credit applies primarily to new construction, but select renovations are also eligible as long as they’re substantial and meet energy efficiency requirements.
4. What if my project meets some but not all requirements?
To be eligible for the 45L tax credit, projects must meet the full Energy Star and/or DOE ZERH requirements. The former has a lower bar to entry (and dollar value).
5. How does prevailing wage affect multifamily developers?
Prevailing wage requires multifamily developers to pay fair market wages to all laborers involved in a project to be eligible for the full per-unit credit of $5,000.
Maximize your tax savings with expert guidance
Builders and developers looking to reduce costs should consider using energy-efficient methods (and meeting prevailing wage guidelines) to qualify for the 45L tax credit. By incentivizing these practices, the program rewards businesses for making the world a better place—so long as they recognize and realize the benefit.
Archer Lewis helps builders through the whole process, from determining tax credit eligibility to preparing for energy audits and then filing Form 8908 with the IRS. To learn more about how we can help, check out resources such as our tax credit guide.
Get in touch today to discover the difference working with Archer Lewis can make.
