Take Advantage of the 45L Tax Credit for Residential Development
Residential builders, investors, and developers can now qualify for up to $5,000 in tax credits for every energy-efficient dwelling unit. The IRS updated its 45L tax credit program in 2023 to align with Department of Energy programs for Energy Star and Zero Energy Ready Homes. As a result, this incentive is now available for high-rise housing developments in addition to low-rise developments as in prior years. Partner with KBKG to see if your current or upcoming projects may benefit from this valuable tax credit.
45L Tax Credit Eligibility Requirements
Investors, builders, and developers can apply 45L tax credits to energy-efficient homes and units sold or leased after December 31, 2005. To claim this incentive, you must demonstrate that the unit uses significantly less heating and cooling energy than the established standard. The single-family home development, condominium project, or apartment building must have at least 20 units to qualify. You can use the credit for both new construction and substantial renovations, as long as you have already rented or sold the units for residential use.
Amount of 45L Tax Credits
Under 45L tax credit Inflation Reduction Act changes, multifamily developers can access a credit of:
- $500 per unit for a building that meets EnergyStar requirements
- $1,000 per unit for a building that meets Zero Energy Ready requirements
- $2,500 per unit for a building that meets EnergyStar requirements and the IRS prevailing wage guidelines
- $5,000 per unit for a building that meets EnergyStar requirements and the IRS prevailing wage guidelines
For builders of single-family homes, the credit is $2,500 per EnergyStar property and $5,000 for each Zero Energy Ready property. With these changes to the section 45L tax credit, the developer of a 30-unit property could potentially obtain a credit of $150,000. For 1,000 units, the available credit amount rises to $5 million.
Note that these updated amounts apply only to properties acquired on or after January 1, 2023. For properties purchased prior to 2023, you can access a credit of either $1,000 or $2,000 depending on the type of property and the amount of energy reduction achieved.
Prevailing Wage Requirements
To claim the maximum credit as a builder, developer, or investor, you must pay all mechanics and laborers on the project at least the IRS prevailing wage. The Secretary of Labor establishes a basic hourly wage plus fringe benefits based on geographic area and the type of work. You must also use apprentices on the project for a specified number of hours.
The experienced tax analysts at KBKG can ensure you comply with the detailed recording requirements for the prevailing wage. You must carefully document the hours worked by all mechanics, laborers, and apprentices, including both subcontractors and contractors. Records must also include each person’s hourly rate, the amount of actual wages paid, and anything deducted from those wages such as union dues or health insurance.
Expert Consultation for the 45L Tax Credit
To qualify for the 45L tax credit, you must submit a detailed energy analysis with certification from a qualified third party. KBKG provides the documentation you need to maximize your available credit and support your claim in the event of an audit. Our multidisciplinary team of tax experts and engineers serve as invaluable advisors throughout the development, construction, and tax preparation process.
When you partner with KBKG, you’ll receive a comprehensive report with all the calculations and certifications you need for IRS compliance. We’ll work with your internal finance team throughout the process to ensure you can successfully claim this valuable credit. In fact, we’ve already secured millions of dollars in 45L credits for multi-family buildings and developments all over the country. Reach out today to optimize your tax incentives for energy-saving residential construction with KBKG.