Inflation Reduction Act Updates to the IRC Sec. 45L Tax Credit

The Inflation Reduction Act of 2022 (“IRA 2022” or “the Act”) extends, modifies, and expands the Energy Efficient Home Credit (the IRC Sec. 45L tax credit).  The credit that expired 12/31/2021 was extended through 12/31/2022.  The Act expanded the credit beginning in 2023 and extended it through 2032.

IRC Sec. 45L tax credits are available for eligible contractors for the construction or rehabilitation of energy-efficient residential units or dwellings that are leased or sold.

The eligible contractor – typically the developer, builder, or homeowner – is the only person who can claim the IRC Sec. 45L tax credit, and they must own the unit at the time of construction or improvement.

A “person” can also be a corporation, estate, trust, partnership, or association.

The building standards necessary to qualify for the credit are governed by the Environmental Protection Agency through the Energy Stary Program and the Department of Energy Zero Energy Ready Home Program.

The Internal Revenue Code has been modified to include a prevailing wage requirement.  These wage requirements ensure that laborers, mechanics, contractors, or subcontractors are paid wages not less than the prevailing rates for work of a similar character in the locality, as determined by the Secretary of Labor.  Adherence to the prevailing wage requirements increases the available tax credit.

Modifications Effective January 1, 2023

Single-Family Home Requirements – the standards to qualify for the credit vary by state and/or region and are expected to be updated every two years.

• The criteria have been time-segmented, and the maximum available credit has increased up to $5,000.
• The program requirements are expected to be updated every two years beginning January 2023 and have been set through December 31, 2026. The requirements may differ by state and/or region.
  • Zero Energy Ready Home Program – credit available, $5,000
  • Energy Star Single-Family New Homes National Program – credit available, $2,500

Multi-Family Home Requirements – the standards to qualify for the credit vary by state and/or region.  Like single-family home requirements, the criteria will be time-segmented and are expected to be updated every three years. The maximum credit available for multi-family units is generally $1,000 and can be taken in addition to IRC Sec. 179D deductions. 

• Residential buildings are no longer limited to three-stories.
• Basis adjustments are not required for low-income housing.
  • Zero Energy Ready Multi-Family Home Program – credit available, $1,000
  • Energy Star Multifamily New Construction – credit available, $500
• If the prevailing wage requirements have been met, the available credit is increased up to $5,000

Claiming an IRC Sec. 45L tax credit involves complex calculations. For example, there are several methods for obtaining the tax credit depending on the energy-efficiency levels of each project.

It is also important to understand certain limitations as part of the effort to meet all the requirements and get full credit for the past two years.