When The Inflation Reduction Act (IRA) was passed in 2022, one key focus area centered around climate change, creating tax incentives for home builders and multifamily developers constructing energy efficient homes. 

As you design and build for your business, our construction and real estate accountants encourage home builders to keep these tax incentives in mind. 

45L Tax Credit

The IRA extended the 45L tax credit through 2032 and provides eligible contractors with a business tax credit for eligible new or substantially reconstructed homes that meet applicable ENERGY STAR home program or the Department of Energy’s (DOE) Zero Energy Ready Home (ZERH) program requirements. The amended 45L tax credit applies to qualified new energy efficient homes acquired after Dec. 31, 2022, and before Jan. 1, 2033, and may be claimed for the taxable year in which the home or dwelling unit was acquired for use as a residence. 

Credit amounts available under Section 45L for ENERGY STAR and ZERH-certified homes are as follows: 

Section 179D Deduction

The 179D deduction, also known as the energy efficient commercial buildings deduction, had some significant changes in the deduction amounts and qualifying criteria, thanks to the IRA. Plus, the deduction is now allocable to architects, engineers and designers responsible for designing a building’s energy efficient systems.

Under the IRA, the deduction amount was increased from $1.88/SF to $5.00/SF beginning on Jan. 1, 2023. However, the construction company must ensure the project work was performed by a qualified apprentice who: 

• Completed a registered apprenticeship program.
• Meets the apprenticeship requirements outlined in the “Apprenticeship Labor Hour Requirements.”

The apprenticeship and prevailing wage requirements for the increased deduction amount creates 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%.

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.

Home Efficiency Rebates (HOMES) Program 

The HOMES program was created to reward taxpayers who focus on making performance-based energy upgrades in homes. Per DOE guidance, upgrades must address at least one major upgrade related to heating and cooling, envelope, and/or water heating end uses, plus meet ENERGY STAR product criteria in effect on the date of installation. 

To qualify, the taxpayer must achieve at least 20% energy savings over a standard reference design. If more than 35% in energy savings is reached, the rebate amount doubles. Taxpayers who achieve between 20% to 35% in energy savings may also earn $2,000 per dwelling unit, with a cap of $200,000 per building. If the improvement reaches more than 35% in energy services, the rebate increases to $4,000 per dwelling unit, with the maximum of $400,000 per building. 

Upgrades made to low- and moderate-income (LMI) households (households with income less than 80% of the area median) may qualify for double the rebates, meaning $4,000 or $8,000 per unit, covering up to 80% of project costs with no building maximum.

Keep in mind, this rebate cannot be combined with any other federal grant or rebate, such as the HEEHR Rebate. 

High-Efficiency Electric Home (HEEHR) Rebate

This is a 10-year rebate program was designed to incentivize owners of multifamily buildings who replace old electric resistance and gas appliances with new energy efficient ones. To qualify, the building must have at least 50% of residents who are considered LMI households (who earn between 80% of 150% of their area median income). Contractors who perform electrification projects in LMI communities may qualify for contractor rebates up to $500 per project. 

Similar to the HOME Rebate, this rebate also cannot be combined with other federal programs.

Maximize Your Incentives 

As you continue building energy efficient properties or making enhancements, these tax incentives can present significant tax-savings opportunities when done with the right strategy. Our Construction & Real Estate Group understands the ins and outs of these strategies and work closely with home builders to maximize these incentives. Whether you want to assess your savings potential, determine your current eligibility or obtain overall tax guidance for your business, we know the way.