Fed Tax Incentives: Energy Efficient Home Credit 

Background

The Energy Efficient Home Credit, as established by the Energy Policy Act of 2005 and codified under §45L of the Internal Revenue Code is a benefit available to taxpayers for each qualified new energy efficient home which is constructed by an eligible contractor, and acquired by a person from the eligible contractor for use as a residence during the tax year. This incentive was recently extended by the “Further Consolidated Appropriations Act, 2020” and applies to residences sold or leased on or before December 31, 2020.

The IRC § 45L credit is $2,000 for each newly constructed or substantially reconstructed qualifying residence ("dwelling unit") that is certified to have an annual level of heating and cooling energy consumption at least 50% below the annual level of heating and cooling energy consumption of a “comparable dwelling unit” and has building envelope component improvements that account for at least 10% reduction in energy consumption. 

The IRS has defined a "dwelling unit" as a single unit providing complete independent living facilities for one or more persons, including permanent provisions for living, sleeping, eating, cooking and sanitation within a building that is not more than three stories above grade in height. Based on this definition, the units within an apartment building, the units within a condominium, a houseboat or a house trailer may qualify for the IRC § 45L credit as well as a traditional home. There is no requirement in Code Section IRC § 45L that the property used as a residence be the person’s principal residence. Thus, assuming the other requirements of Code Section IRC § 45L are satisfied, vacation homes may also qualify for the credit.

§45L also provides an alternative Energy Efficient Home Credit of $1,000 per unit for an eligible contractor with respect to a "manufactured home" under similar qualification standards. In general, the manufactured home must have a projected level of annual heating and cooling energy consumption that is at least 30% below the annual level of heating and cooling energy consumption of a "comparable dwelling unit" and has building envelope component improvements that account for at least 10% reduction in energy consumption in the same climate zone. It must also conform to the Federal Manufactured Home Construction and Safety Standards.

Whether the property meets the energy savings requirements, the applicable construction standards are based on the 2006 International Energy Conservation Code (IECC). In general, a comparable dwelling unit to evaluate energy reduction to qualify for the credit (1) must be constructed according to the standards of chapter 4 of the 2006 International Energy Conservation Code, including supplements, as in effect on January 1, 2006; and (2) its heating and cooling equipment efficiencies must correspond to the minimum allowed by Department of Energy regulations under the National Appliance Energy Conservation Act of 1987 that are in effect when its construction is completed.

However, today’s energy efficient building often surpass these outdated standards, many current homes can exceed the standards and qualify this cash saving opportunity.

Property eligible for the Energy Efficient Home Credit may include:

  • Affordable housing (LIHTC)

  • Single Family Homes

  • Townhouses (i.e. multi-family buildings)

  • Apartments

  • Condominiums

  • Production home developments

  • Substantial reconstruction or rehabilitation

  • Assisted Living Homes and

  • Student Housing

Who can benefit?

  • Homebuilders

  • Multifamily Developers

Example Potential Benefit of 45L Credit:

Regarding an owner of an apartment building, assume the following facts: XYZ Company, LLC had an apartment complex constructed that was completed in October of 2019. The apartment building is three stories tall and has 1000 units within the building. XYZ Company, LLC owned the property during construction of the apartment building and therefore is considered the “eligible contractor.” Assuming the 50% energy reduction requirements are satisfied and 900 units are occupied as of December 31, 2019, the potential tax credit for XYZ Company, LLC would be $1,800,000 (900 units * $2,000 per unit). Although the apartment was completed in 2019 with 1000 units available, it may be limited to the 900 occupied units as the dwelling needs to be used as a residence in order to qualify. Any additional units occupied in 2020 would also be eligible for the credit in that year. As part of the 2019 credits claimed, the depreciable basis of the apartment building would also be reduced by $1,800,000.  See I.R.C. § 45L(e) ("basis reduction").

In general, all residential developments and apartment buildings completed within the last 3 years are worth assessing for potential §45L tax credits. And again, eligible construction also includes substantial reconstruction and rehabilitation. Homebuilders and developers may even still claim the §45L tax credit retroactively if they did not claim them on previous tax returns (regarding homes completed after December 31, 2017).

 

How AndreTaxCo Can Help
  • Perform free assessments to investigate and pre-qualify applicable property

  • Coordinate with your taxpreparer to claim the credit

  • Certify the energy efficiency, which may require:

    • Review of construction documents;

    • Site visits; and

    • Discussions with building designers, project managers and related personnel.

Background: Allowance Of Credit

IRC § 45L provides a credit to an eligible contractor who constructs a qualified energy efficient home. In general, pursuant to IRC § 45L(a), in the case of an eligible contractor, the new energy efficient home credit for the taxable year is calculated for the following:

  • (1) each qualified new energy efficient home which is

    • IRC § 45L(b)(2) Qualified defines “qualified new energy efficient home” means a dwelling unit—

      • located in the United States,

      • the construction of which is substantially completed after after December 31, 2017, and before January 1, 2021, and

        • IRC § 45L(b)(3) defines the term “construction” includes substantial reconstruction and rehabilitation.​

      • which meets the energy saving requirements of ​IRC § 45L(c).​​

        • A dwelling unit meets the energy saving requirements of this subsection if such unit is—

          • certified in writing in a readily verifiable manner which specifies the energy efficient building envelope components and energy efficient heating or cooling equipment installed and their respective rated energy efficiency performance in accordance with guidance prescribed by the Secretary, after consultation with the Secretary of Energy to have a level of annual heating and cooling energy consumption which is at least​:

            • $2000 Credit - Qualified Energy Efficient Homes: 50% below the annual level of heating and cooling energy consumption of a comparable dwelling unit to have building envelope component improvements account for at least 1/5 of such 50%; or​

            • $1000 Credit - Manufactured Home: 30% below the annual level of heating and cooling energy consumption of a comparable dwelling unit to have building envelope component improvements account for at least 1/3 of such 30%, or meets the requirements established by the Administrator of the Environmental Protection Agency under the Energy Star Labeled Homes program;

          • which the heating and cooling equipment efficiencies correspond to the minimum allowed under the regulations established by the Department of Energy pursuant to the National Appliance Energy Conservation Act of 1987 and in effect at the time of completion of construction (see IRC § 45L(c)(1)(A)(ii));

          • constructed in accordance with the standards of chapter 4 of the 2006 International Energy Conservation Code, as such Code (including supplements) is in effect on January 1, 2006 (see IRC § 45L(c)(1)(A)(i)); and

          • is a manufactured home which conforms to Federal Manufactured Home Construction and Safety Standards (part 3280 of title 24, Code of Federal Regulations) (see IRC § 45L(c)(2)).​

  • (2) constructed by the eligible contractor, and

    • IRC § 45L(b)(1) defines “eligible contractor” means—

      • (a)  the person who constructed the qualified new energy efficient home, or

      • (b) in the case of a qualified new energy efficient home which is a manufactured home, the manufactured home producer of such home.​

  • (3) acquired by a person from such eligible contractor for use as a residence during the taxable year in the case of a dwelling unit.

    • IRC § 45L(b)(4) defines the term “acquire” includes purchase.​

    • It is acquired (i.e. sold or leased) from the eligible contractor after December 31, 2017, and before January 1, 2021, for use as a residence (the credit can be taken retroactively for 3 years back or to any open tax year). See IRC § 45L(g)

    • "Acquired from Eligible Contractor" (See ​Notice 2008-35)

      • A qualified energy efficient home is acquired from an eligible contractor for use as a residence if the person that constructed the home sells or leases the home to another person for use as a residence.

      • A qualified energy efficient home is not acquired from an eligible contractor if the person that constructed the home retains the home for use as a residence.

      • For example, a qualified energy efficient home is acquired from an eligible contractor in the following situations:

        • (1) A person constructs a qualified energy efficient home and then sells the home to the homeowner.

        • (2) A person constructs a qualified energy efficient home and then leases the home to the lessee or tenant.

        • (3) A person hires a third party contractor to construct a qualified energy efficient home and then sells the home to the homeowner. 

Energy Saving Requirements

To meet the energy saving requirements of IRC § 45L(c)(1), a dwelling unit must meet the following applicable criteria:

  • Certified: 

    • to provide a level of heating and cooling energy consumption that is at least 50% below that of a reference dwelling unit constructed in accordance with the standards of chapter 4 of the 2006 International Energy Conservation Code, as such Code (including supplements) is in effect on January 1, 2006, and

      • A "reference dwelling unit" (See Notice 2008-35is a dwelling unit that is similar in technical specifications and design to the dwelling unit constructed by the eligible contractor except that--

        • (a) The reference dwelling unit is constructed in accordance with the minimum standards of Chapter 4 of the 2006 IECC Supplement;

        • (b) The reference dwelling unit’s air conditioners have a Seasonal Energy Efficiency Ratio (SEER) of 13, measured in accordance with 10 C.F.R. 430.23(m); and

        • (c) The reference dwelling unit’s heat pumps have a SEER of 13 and a Heating Seasonal Performance Factor (HSPF) of 7.7, measured in accordance with 10 C.F.R. 430.23(m). 

    • for which the heating and cooling equipment efficiencies correspond to the minimum allowed under the regulations established by the Department of Energy pursuant to the National Appliance Energy Conservation Act of 1987 and in effect at the time of completion of construction, and

    • to have building envelope component improvements that provide for a level of heating and cooling energy consumption that is at least 10% below ("1/5 of such 50 percent") that of a reference dwelling unit. 

      • "Building envelope components" (See ​Notice 2008-35) are basement walls, exterior walls, floor, roof, and any other building element that encloses conditioned space, including any boundary between conditioned space and unconditioned space. 

      • A "dwelling unit" (See ​Notice 2008-35is a single unit providing

        • complete independent living facilities for one or more persons,

        • including permanent provisions for living, sleeping, eating, cooking, and sanitation,

        • within a building that is not more than three stories above grade in height.

  • A manufactured home which conforms to Federal Manufactured Home Construction and Safety Standards (part 3280 of title 24, Code of Federal Regulations) and which meets the requirements of stated above, OR 

    • A "manufactured home" (See ​Notice 2008-35is a dwelling unit constructed in accordance with the Federal Manufactured Home Construction and Safety Standards (24 C.F.R. 3280).​

  • A manufactured home which conforms to Federal Manufactured Home Construction and Safety Standards (part 3280 of title 24, Code of Federal Regulations) and which is 

    • Certified (see below); OR 

      • to provide a level of heating and cooling energy consumption that is at least 30% below that of a reference dwelling unit constructed in accordance with the standards of chapter 4 of the 2006 International Energy Conservation Code, as such Code (including supplements) is in effect on January 1, 2006, and 

      • for which the heating and cooling equipment efficiencies correspond to the minimum allowed under the regulations established by the Department of Energy pursuant to the National Appliance Energy Conservation Act of 1987 and in effect at the time of completion of construction, and 

      • to have building envelope component improvements that provide for a level of heating and cooling energy consumption that is at least 10%  below ("1/3 of such 30 percent") that of a reference dwelling unit

    • Meets the requirements established by the Administrator of the Environmental Protection Agency under the Energy Star Labeled Homes program.

      • For purposes of section (see IRS Announcement 2006-88), heating and cooling energy consumption must be calculated in accordance with the procedures prescribed in Residential Energy Services Network (RESNET) Publication No. 05-001 (Nov. 17, 2005) or No. 06-001 (June 1, 2006) or in accordance with an equivalent calculation procedure.​

        • An "equivalent calculation procedure" (See ​Notice 2008-35is a procedure that produces results comparable to the results obtained under the procedures prescribed in Residential Energy Services Network (RESNET) Publication No. 05-001 (Nov. 17, 2005) or No. 06-001 (June 1, 2006).​​​​

Certification

An "eligible contractor" must obtain the certification required under § 45L(c)(1) with respect to a dwelling unit (other than a manufactured home) from an "eligible certifier" before claiming the energy efficient home credit with respect to the dwelling unit.

  • An "eligible contractor" (See ​Notice 2008-35is the person that constructed a qualified energy efficient home. A person must own and have a basis in the qualified energy efficient home during its construction to qualify as an eligible contractor with respect to the home.

    • For example, if the person that hires the third party contractor to construct the home owns and has the basis in the home during its construction, the person that hires the third party contractor is the eligible contractor and the third party contractor is not an eligible contractor. 

    • An eligible contractor is not required to file the certification with the return on which the credit is claimed. However, § 1.6001-1(a) of the Income Tax Regulations requires that taxpayers maintain such books and records as are sufficient to establish the entitlement to, and amount of, any credit claimed by the taxpayer. Accordingly, an eligible contractor claiming a $2,000 credit under § 45L should retain the certification as part of the eligible contractor’s records to satisfy this requirement

  • ​An "eligible certifier" (See ​Notice 2008-35) is a person that is

    • not related (within the meaning of IRC § 45(e)(4)) to the eligible contractor;

    • has been accredited or otherwise authorized by RESNET (or an "equivalent rating network") to use energy performance measurement methods approved by RESNET (or the "equivalent rating network"); 

    • an employee or other representative of a utility or local building regulatory authority qualifies as an eligible certifier if the employee or representative has been accredited or otherwise authorized by RESNET (or an equivalent rating network) to use the approved energy performance measurement methods.​

      • An "equivalent rating network" (See ​Notice 2008-35) includes, in a state that has established energy efficiency standards under which a dwelling unit is required to achieve a specified aggregate level of heating and cooling energy consumption for any purpose (including compliance with building codes or eligibility for a state grant or tax credit), the state agency administering those standards. Thus, if the agency has accredited or otherwise authorized a person to use energy performance measurement methods approved by the agency for use in determining whether the state’s energy efficiency standards are satisfied, the person so accredited or authorized qualifies as an eligible certifier.​

The certification will be treated as satisfying the requirements of § 45L(c)(1) if all construction has been performed in a manner consistent with the design specifications provided to the eligible certifier and the certification contains all of the following (See ​Notice 2008-35):

​​

  • (1) The name, address, and telephone number of the eligible certifier.

  • (2) The address of the dwelling unit.

  • (3) A statement by the eligible certifier that--

    • (1) The dwelling unit has a projected level of annual heating and cooling energy consumption that is at least 50 percent below the annual level of heating and cooling energy consumption of a reference dwelling unit in the same "climate zone";

      • A "climate zone" (See ​Notice 2008-35is a geographical area within which all locations have similar long-term climate conditions as defined in Chapter 3 of the 2006 IECC Supplement.​ 

    • (2) Building envelope component improvements alone account for a level of annual heating and cooling energy consumption that is at least 10 percent below the annual level of heating and cooling energy consumption of a reference dwelling unit in the same climate zone; and

    • (3) Heating and cooling energy consumption have been calculated in the manner prescribed by the applicable code sections

  • (4) A statement by the eligible certifier that field inspections of the dwelling unit (or of other dwelling units under the sampling protocol described below) performed by the eligible certifier during and after the completion of construction have confirmed that all features of the home affecting such heating and cooling energy consumption comply with the design specifications provided to the eligible certifier. 

    • With respect to builders who build at least 85 homes during a twelve-month period or build subdivisions with the same floor plan using the same subcontractors, the eligible certifier may use the sampling protocol found in the current ENERGY STAR® for Homes Sampling Protocol Guidelines instead of inspecting all of the homes. The sampling protocols can be found at the following web address: https://www.energystar.gov/partner_resources/residential_new/program_reqs

  • (5) A list identifying--

    • (1) The dwelling unit’s energy efficient building envelope components and their respective energy performance ratings as required by  standards of chapter 4 of the 2006 International Energy Conservation Code, as such Code (including supplements) is in effect on January 1, 2006; and

    • (2) The energy efficient heating and cooling equipment installed in the dwelling unit and the energy efficiency performance of such equipment as rated under applicable Department of Energy Appliance Standards test procedures.

  • (6) Identification of the listed software program used to calculate energy consumption (e.g. section 5 of Notice 2008-35 for prior listings of software programs applicable).

    • SOFTWARE PROGRAMS

      • ​In general, the Internal Revenue Service (See ​Notice 2008-35has acknowledges a public list (complied by the U.S. Department of Energy) of software programs that may be used to calculate energy consumption for purposes of providing a certification.The IRS has previously stated a software program may be included on the list (compiled by the U.S. Department of Energy) if the software developer submits the following information to the Service and RESNET:

        • (1) The name, address, and telephone number of the software developer,

        • (2) The name or other identifier of the program as it will appear on the list,

        • (3) The test results, test runs, and the software program with which the test was conducted, and

        • (4) A declaration by the developer of the software program, made under penalties of perjury, that the software program-- 

          • (i) Has satisfied all tests required to conform to the software accreditation process prescribed in Residential Energy Services Network (RESNET) Publication No. 05-001 (Nov. 17, 2005) or No. 06-001 (June 1, 2006); or

          • (ii) Has satisfied all tests necessary to permit a determination that the software program is sufficiently accurate to justify its use in calculating energy consumption for purposes of providing a certification. ​​

  • (7) A declaration, applicable to the certification and any accompanying documents, signed by a person currently authorized to bind the eligible certifier in these matters, in the following form:

    • “Under penalties of perjury, I declare that I have examined this certification, including accompanying documents, and to the best of my knowledge and belief, the facts presented in support of this certification are true, correct, and complete.”

Claiming the IRC §45L Credit: General Background 
  • (1) Certification must be obtained to verify that the home satisfies specific energy efficiency requirements.

  • (2) The credit is claimed by the “eligible contractor.” For purposes of the 45L tax credit, an eligible contractor is the person who constructed the qualified new energy efficient home. A person must own and have a basis in the qualified energy efficient home during its construction to qualify as an eligible contractor with respect to the home.

    • For example, if a person that hires a third party contractor to construct the home owns and has the basis in the home during its construction, that person is the eligible contractor and not the third party contractor. A “person” can be an individual, a trust, an estate, a partnership, an association, a company or a corporation.

  • (3) Further, certification must be done using an independent, qualified individual to verify and certify that the property installed satisfies specific energy efficiency requirements using IRS-approved software.

  • (4) A site visit is generally required to verify installation of the energy efficient features.

  • (5) The tax credit is filed using IRS Form 8908, Energy Efficient Home Credit for each qualified energy efficient home sold during the year.

    • The eligible contractor reports the amount of the current year credit shown on Line 4 of Form 8908 and on line 1p, Part III of Form 3800 to determine the amount of his allowable general business credit for the tax year.

    • Being a credit, it has the potential to lower taxes dollar for dollar. However, this type of general business credit is not allowable as a credit to offset the Alternative Minimum Tax (AMT) at the shareholder level (AMT generally no longer applies to C-corporations starting in 2018).

      • To illustrate the effect of the AMT, assume the following facts: If an individual had a 45L credit in 2019 in the amount of $20,000, his regular tax was $80,000 and the tentative minimum tax was $78,000, only $2,000 of the 45L credit would have been allowed in 2019 (the difference between the regular tax and tentative minimum tax).

  • (6) The Internal Revenue Code generally provides for a one-year carryback and 20-year carryforward for the current year unused business credits.

    • Specifically, if the sum of the business credit carryforwards to the tax year plus the amount of the current year business credit for the tax year exceeds the Code Section 38(c) limitation based on net tax liability for the tax year (called the “unused credit year”), the excess (to the extent attributable to the current year credit) is available as a business credit carryback to the one tax year preceding the unused credit year, and as a carryforward to each of the 20 years following the unused credit year.

  • (7) For purposes of claiming the Energy Efficient Home Credit, I.R.C. § 45L(f)  provides expenditures taken into account under the Investment Tax Credit IRC § 47 (Rehabilitation Credit) or IRC § 48(a) (Energy Credit) shall not be taken into account for I.R.C. § 45L.​​

See IRS Link for additional background:
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