45L Tax Credit – Congress Reinstates Tax Credit for Energy Efficient Homes

On Feb. 9th, 2018, the Bipartisan Budget Act was passed, providing a one-year retroactive extension for the Section 45L tax credit for multi-family and residential units. This legislation extended the New Energy Efficient Home Tax Credit under Code Section 45L through the end of 2017. The Code Section 45L credit is the applicable amount 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.

In determining whether the dwelling meets the energy savings requirements, the applicable construction standards are based on the 2006 International Energy Conservation Code (IECC). With today’s energy efficient building trends and the fact that the 45L benchmark is based on earlier standards, many current homes can exceed the standards and qualify. The credit is generally $2,000 for a qualifying residence that is:

  • located in the United States,
  • was substantially completed after a tax year inside the statute of limitations and before December 31, 2017, and
  • meets the energy savings requirements of Code Section 45L(c). To meet this requirement, the dwelling must generally be certified in accordance with guidance prescribed by the IRS to have a projected level of annual heating and cooling energy consumption that meets the standards for the 50% reduction in energy usage.

For purposes of the new energy efficient home credit, construction includes substantial reconstruction and rehabilitation. 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.

Another requirement to be eligible for the 45L credit is that the home is a “dwelling” unit. A dwelling unit is 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 might qualify for the 45L credit as well as a traditional home. There is no requirement in Code Section 45L that the property used as a residence be the person’s principal residence. Thus, assuming the other requirements of Code Section 45L are satisfied, vacation homes might qualify for the credit.

To illustrate the potential impact of the 45L credit for the owner of an apartment building, assume the following facts: ABC Company, LLC had an apartment complex constructed that was completed in October of 2016. The complex is three stories tall and has 950 units within the building. ABC Company, LLC owned the property during the construction of the apartment building and is therefore considered the “eligible contractor.” Assuming the 50% energy reduction requirements are satisfied and 800 units are occupied as of December 31, 2016, the potential tax credit for ABC Company, LLC would be $1,600,000 (800 units * $2,000 per unit). Even though the apartment was completed in 2016 with 950 units available, it is limited to the 800 occupied units as the dwelling needs to be used as a residence in order to qualify. Any additional units occupied in 2017 would also be eligible for the credit in that year. As part of the 2016 credits claimed, the depreciable basis of the apartment building would also be reduced by $1,600,000.

Eligible contractors use Form 8908 to claim a 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). To illustrate the effect of the AMT, assume the following facts: If an individual had a 45L credit in 2017 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 2017 (the difference between the regular tax and tentative minimum tax).

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.

As part of the New Energy Efficient Home Tax Credit under Code Section 45L, a $1,000 credit is also available for an eligible contractor with respect to a manufactured home. 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 reference dwelling unit in the same climate zone. It must also conform to the Federal Manufactured Home Construction and Safety Standards.

For more information, please contact your tax advisor.

Contact

Stuart Nofsinger, Partner | DHG Tax
704.367.5924 | stuart.nofsinger@dhg.com