What Is the 45L Tax Credit for Contractors?

The 45L tax credit is a federal incentive available to contractors, builders, and developers. It is designed to encourage the construction and substantial reconstruction of energy-efficient homes. By providing a direct credit against federal income taxes, the program aims to lower the initial cost barrier associated with building homes that exceed standard energy codes. The incentive is structured to reward the construction of single-family, multifamily, and manufactured homes that meet specific energy-saving benchmarks. The credit directly benefits the builder, who can then factor these savings into the project’s financial structure.

Contractor and Property Eligibility

To qualify for the 45L credit, the builder and the property must meet specific criteria. The eligible contractor is the person or entity that constructs or substantially reconstructs the qualified home and has a tax basis in it during construction. This includes developers and home builders, but generally not a general contractor hired for a fee without an ownership stake, as the contractor must own the property during the construction phase.

A property qualifies as a new energy-efficient home if it is a dwelling unit located in the United States. Its construction must have been substantially completed, and it must be sold or leased to another person for use as a residence. Following the Inflation Reduction Act of 2022, the three-story height restriction was removed for homes acquired after December 31, 2022. This change makes projects of any height, including mid-rise and high-rise apartment and condominium buildings, eligible.

Energy Efficiency Requirements and Credit Amounts

The standards a home must meet to qualify for the 45L credit and the corresponding credit amount have changed. For homes acquired before January 1, 2023, the credit was $2,000 per unit and required the home’s energy consumption to be at least 50% below that of a comparable home built to 2006 International Energy Conservation Code standards.

Following the Inflation Reduction Act of 2022, a tiered system was introduced for homes acquired from 2023 through 2032. The credit is now tied to meeting the requirements of specific ENERGY STAR or Department of Energy (DOE) Zero Energy Ready Home (ZERH) programs.

For single-family homes, meeting ENERGY STAR standards qualifies the builder for a $2,500 credit per unit. A higher credit of $5,000 is available if the home meets the more rigorous ZERH program standards.

For multifamily properties, a builder can claim:

• $500 per unit for meeting ENERGY STAR requirements.
• $2,500 per unit for meeting ENERGY STAR requirements and satisfying prevailing wage requirements.
• $1,000 per unit for meeting ZERH program standards.
• $5,000 per unit for meeting ZERH program standards and satisfying prevailing wage requirements.

Required Certification and Documentation

Before a contractor can claim the 45L tax credit, the property’s energy efficiency must be verified and certified by an independent third party. The certifier must be a qualified individual, often a Home Energy Rating System (HERS) Rater recognized by an organization like the Residential Energy Services Network (RESNET), who is not related to the contractor. This ensures an unbiased assessment of the property’s energy performance.

The certification process involves an inspection and analysis of the home’s energy features. This includes computer modeling to project annual energy use and on-site testing to verify that construction meets the specified program requirements, such as those for ENERGY STAR or ZERH. The certifier will then produce a formal certification document for each qualifying dwelling unit.

This certification must be obtained before the home is sold or leased and before the tax credit is claimed. The document must contain the certifier’s name, address, and professional credentials, the full address of the certified property, and a declaration under penalties of perjury that the home complies with the relevant energy standards.

Claiming the Credit and Tax Implications

Once the required certification is secured, the eligible contractor can claim the credit on their federal tax return using IRS Form 8908, Energy Efficient Home Credit. The contractor uses the information from the third-party certification to complete this form, detailing the number of qualified homes and the credit amount being claimed for each.

The credit calculated on Form 8908 is part of the General Business Credit. The total from Form 8908 is transferred to Form 3800, General Business Credit, which is then filed with the contractor’s primary income tax return. Partnerships and S corporations must file Form 8908 to claim the credit at the entity level before passing it through to the partners or shareholders.

Claiming the 45L credit requires a basis adjustment. The eligible contractor must reduce their cost basis in the property by the amount of the tax credit claimed. This adjustment increases the amount of taxable gain or reduces the loss the contractor will recognize when the property is sold.