Energy-Efficient Credit Extends to Year End

SAN FRANCISCO—One positive in this pivot year is that the energy-efficient home credit codified in Internal Revenue Code Section 45L has been extended from January 1, 2018 to December 31, 2020. The credit provides $1,000 or $2,000 to contractors or developers for newly built or substantially renovated energy-efficient residential dwelling units that are purchased, leased or rented from the contractor and used as a residence.

“The 45L energy-efficient home credit is sometimes overlooked by housing builders and developers, and with the credit set for expiration this year, it should be high on the list of strategies to consider for new or recently completed projects,” Jeff Shilling, Portland-based director of Moss Adams’ Oregon-Northern California Tangible Assets group, tells GlobeSt.com.

An eligible contractor/developer must meet both of these criteria: have constructed or substantially renovated the energy-efficient residential dwelling unit and own/have a basis in the property during its construction.

The eligible contractor definition also includes an individual, trust, estate, partnership, association, company or corporation that hired a third-party contractor to complete the work if that contractor also meets the two criteria, such as ownership and basis during construction.

“It’s a fairly wide group that meets the criteria including individuals, trusts and estates, partnerships, associations, and companies that hire a third-party contractor to complete the work if they also meet the two criteria such as ownership and basis during construction,” Shilling tells GlobeSt.com. “Another important point is that a contractor/developer can amend open returns from previous years to claim the credit and can carry-forward the credit up to 20 years. Housing contractor/developers may be surprised to learn how the energy credit can apply to current or completed projects after reviewing them through a 45L lens.”

Defining Energy-Efficient Criteria

A dwelling unit must first be tested and certified to have energy usage for heating and cooling at least 50% less than a reference property in the same climate zone. And, the dwelling unit’s building envelope components, insulation and energy-efficient windows, for example, must be responsible for at least 10% of the energy reduction.

Types of Qualifying Property

• Single-family homes
• Multifamily buildings, such as townhomes, condos, duplexes and apartments, all of which must be three stories above-grade or less
• House boats
• Trailer homes
• Manufactured homes, which qualify for a $1,000 with only a 30% energy reduction

Properties can be primary or vacation residences and must meet the following criteria:

• Be newly constructed or sustainably renovated
• Located in the United States
• Substantially completed between August 8, 2005 and December 31, 2020

How to File for the Credit

The energy efficient home credit is an IRC Section 38 general business credit that’s claimed on the contractor/developer’s tax return for the year the dwelling units are leased or sold. Accordingly, an eligible contractor/developer could be able to amend open returns from previous years to claim the credit. The credit may carry forward 20 years.

Sampling is available for firms that build more than 85 dwelling units per year or subdivisions with the same floor plans using the same subcontractors.

For example, Moss Adams worked with a West Coast residential construction company that pulled together a summary of home deliveries by subdivision and plan type, along with a sample of construction drawings and building code compliance-related energy reports.

Reviewing the information with the help of a certified IRC Section 45L inspector, it was quickly determined that many of the homes would qualify for the $2,000 per dwelling unit credit. After identifying additional data needs, working with the inspector and modeling the homes based upon the drawings and client provided energy reports, additional data was required to meet the more stringent requirements for IRC Section 45L qualification.

The models were updated based upon the additional data and approximately 60 homes were certified for the extended December 2020 filing deadline. In addition, many of the 2019 certified homes were the same as units delivered in 2017 and 2018. Therefore, approximately 110 of the 2017 and 2018 units could be certified.

Another 75 homes from 2017 and 2018 were certified based upon existing data and additional inputs from the HVAC contractor. A total of 185 homes delivered in 2017 and 2018 were certified, and the credits were claimed on amended tax returns. In all, tax credits with a total value just shy of $500,000 were certified for this eligible contractor, GlobeSt.com learns.