Mitigating the adverse effects of climate change is one of the primary targets of the recent Inflation Reduction Act (IRA). The legislation contains many tax incentives, including the significant expansion and extension of two tax deductions for energy-efficient construction. The changes to the Section 179D deduction for commercial buildings and the Section 45L credit for residential homes increase their potential value and make them available to more taxpayers than ever. Check out last week’s blog post on the Sec. 179D deduction. Today, we are discussing the Sec. 45L credit.

The Sec. 45L credit

Similar to the Sec. 179D deduction, the Sec. 45L credit first became accessible in 2006. However, it was only valid until the end of 2021. The credit was given to “qualified contractors” who constructed low-rise, single-family, prefabricated, and multifamily homes that were energy efficient. The houses have to be 50% more energy efficient than a typical housing unit to qualify as per the requirements of the 2006 International Energy Conservation Code. No partial credit was allowed. The maximum credit per unit was $2,000.

For qualifying structures put into operation in 2022, the IRA restored the Sec. 45L credit, extending its original form with the same eligibility criteria and credit amount. However, the credit will be accessible for residential properties of any size, including those with more than three floors, starting in 2023 and lasting through 2032. This indicates that multifamily buildings with four or more stories can be eligible for 179D and 45L.

The IRA, however, has stricter requirements for calculating energy savings. For example, the properties must meet the requirements of Energy Star Manufactured New Homes Program or Energy Star Residential New Construction Program.

In 2023, the base credit amount also changes. For single-family Energy Star homes, it rises to $2,500 per unit. In contrast, it drops to just $500 per unit for multifamily Energy Star homes. However, taxpayers may be eligible for substantially greater credits if they meet other requirements.

For a property that satisfies the stringent Zero Energy Ready Home program requirements, the credit increases to $5,000 per single-family unit and $1,000 per unit for multifamily homes. Suppose the property complies with prevailing wage criteria. In that case, the credit for an Energy Star multifamily facility increases to $2,500 per unit or $5,000 per unit if it is also Zero Energy Ready.

Make the most of the IRA

The energy-related tax provisions of the IRA that apply to both personal and company property go much beyond the Sec. 179D and 45L incentives. Contact our RRBB accountants and advisors to assist you in making the most of all available opportunities to reduce your federal tax liability.

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