Businesses of all sizes and industries can reduce federal income taxes for qualified research expenses

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45L Tax Credits

A Guide to Section 45L Pre and Post IRA

The Inflation Reduction Act (IRA) of 2022 brought a wave of positive changes, and the housing industry wasn’t left out. Section 45L, a tax credit that incentivizes builders to construct energy-efficient homes, got a significant boost. But what exactly changed, and how does it impact builders? Let’s dive into the Pre vs Post IRA landscape of Section 45L.

Pre-IRA: Laying the Groundwork

Before the IRA, Section 45L offered a per-dwelling tax credit to builders who met specific energy-efficiency standards. This credit helped offset construction costs and made energy-efficient residential property more financially attractive. However, the program had limitations:

Credit Max: The maximum credit was $2,000 per unit.
Limited Scope: Only structures three stories or less qualified.
Certification: Homes had to achieve 50% reduction in heating and cooling compared to the 2006 IECC standards.

Post-IRA: Building on a Strong Foundation

The IRA significantly improved Section 45L, making it even more beneficial for builders:

Supercharged Credits: The maximum credit jumped to $2,500 per unit for Energy Star certification and $5,000 per unit for Zero Energy Ready Homes.
No Restriction on # of Stories: The height restriction was lifted, allowing high-rise apartments (4 stories or higher) to qualify.
Modernized Standards: The EPA and DOE certification process aligns with the latest energy-saving practices.
Prevailing Wage Option: Multi-family developers can earn the top credit tier by adhering to prevailing wage requirements for construction workers.
Extended Eligibility: The credit applicability has been extended to 2032, providing stability for long-term planning

§ 45L - PRE vs POST IRA

§ 45L - PRE IRA

§ 45L - POST IRA

Effective Dates

Dwelling units leased/sold before 1/1/2023

1/1/2023-12/31/2032

Qualifying Criteria

50% savings compared to 2006 IECC standards; 10% savings from building envelope

Energy Star / Zero Energy Ready Home (ZERH)

Tax Credit per Unit

$2000

$500 or $2,500 for Energy Star / $1,000 or $5,000 for ZERH

Prevailing Wage

Not required

Required for Multifamily Projects / Single Family Homes, Duplexes, and Townhomes are exempt

# of Stories

Limited to 3 stories or less, above grade

No limitation on the number of stories / ZERH certification limited to 5 stories until the end of 2023

Benefits for Builders and Homeowners

The enhanced Section 45L offers a win-win situation:

Builders: Enjoy increased financial incentives to construct energy-efficient homes.
Homeowners: Benefit from lower energy bills and a more comfortable living environment.
Environment: Reduced energy consumption leads to a smaller carbon footprint.

Building a Greener Future

The revamped Section 45L is a powerful tool that can accelerate the construction of sustainable homes. By making green building more financially rewarding, the IRA paves the way for a more energy-efficient future.

Contact Source Advisors for a Free Assessment

Embrace the power of tax credit savings with Source Advisors and propel your business towards growth and success. Partner with us today to unlock your company’s full potential.