VIEWpoint Issue 1 | 2023
2023 Compliance Trends: Staying Ahead in an Evolving Regulatory E...
2023 Tax Calendar
The Inflation Reduction Act (IRA) significantly altered the 45L credit and 179D deduction amounts and qualification criteria, creating more tax-saving opportunities for home builders and multifamily developers constructing energy-efficient homes. Here is a rundown of some of the major changes, plus what is required to take advantage of these opportunities.
In 2005, Congress passed the original 45L tax credit legislation, which was a tax incentive available to home builders and multi-family developers that allowed “eligible contractors” to claim a $2,000 tax credit for each newly constructed or substantially reconstructed energy-efficient home in the year a dwelling unit is sold or leased as a residence.
In the IRA, the 45L tax credit is extended through 2032, with changes to qualifying standards beginning in 2023 when the credit transitions to the Energy Star criteria. Key credit details include:
Initially, low-rise residential developments were the only ones eligible for this credit, but it is now extended to homebuilders, single-family or multi-family developers. The base qualification requirements for these developers are that they must meet both national and local energy-saving requirements outlined below.
The credit amount will be based on the extent to which each new energy-efficient home meets the energy-saving requirements, which are as follows:
Additionally, eligible contractors will be required to obtain certification that the dwelling unit meets the 45L requirements before claiming the credit. The Internal Revenue Service (IRS) also has updated its Form 8908 to reflect the new record-keeping requirements to support your credit eligibility.
The 179D deduction, also known as the energy-efficient commercial buildings deduction, was made permanent in the Consolidated Appropriations Act in 2021, and the IRA significantly changes the deduction amounts and qualification criteria. Below is an overview of these modifications:
The apprenticeship and prevailing wage requirements for the increased deduction amount create a massive incentive for claimants who meet them. If not met, the maximum deduction would drop from $1.80/SF to $1.00/SF (adjusted for inflation), while the deduction would grow to almost three times the existing rate at $5.00/SF if met. This is calculated by the applicable dollar value times the square footage, subject to the cost-of-living adjustment. Then, the applicable dollar value is equal to $0.50, increased by $0.02 (but not above $1.00) for each percentage point by which the total annual energy and power costs for the building are certified to be reduced by a percentage greater than 25%.
Please keep in mind, the 179D deduction will reduce the depreciable basis of the building. Additionally, because it is treated as depreciation, the 179D deduction may be subject to recapture rules upon the sale of the building.
With these changes taking effect in 2023, home builders are encouraged to work with their tax advisors to evaluate whether they qualify and how to take advantage of these changes this filing season. To learn more about how these can impact you, contact Doeren Mayhew’s dedicated real estate accounting advisors today.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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