What to know about the implementation of the Inflation Reduction Act's amendments to the 45L Credit

What to know about the implementation of the Inflation Reduction Act's amendments to the 45L Credit
By: Derek Gimbel
October 5th, 2023

On September 27, 2023, the IRS released Notice 2023-65 to provide additional detail about the Internal Revenue Code Section 45L New Energy Efficient Home Credit. Section 45L generally provides builders and designers of new, energy-efficient dwelling units a tax credit for each unit sold or leased to a third-party taxpayer in the taxable year. The Inflation Reduction Act of 2022 (IRA) overhauled the Section 45L Credit for homes acquired in the tax year 2023 and beyond.

The IRA’s amendments to 45L include:

• Altering the credit amount and adding a bonus for projects that meet the Prevailing Wage and Apprenticeship Requirements,
• Changing the Energy Saving Requirements to conform to EPA’s “Energy Star” standards for energy-efficient homes, and
• Creating additional bonuses for projects that qualify for EPA’s “Zero Energy Ready Home” (ZERH) program.

BRAYN published an article soon after Congress passed the IRA detailing how these amendments affect potential Section 45L Credit claimants. BRAYN has also published an article on the application of the Prevailing Wage and Apprenticeship Requirements in the context of Section 45L. This article provides additional detail about the updated Section 45L Credit. Specifically, this article addresses (1) the applicable credit amount, (2) the definition of eligible contractor, and (3) the Energy Saving Requirements under the new Section 45L.

1. Applicable Credit Amount

A taxpayer’s Section 45L credit depends on two factors: (1) which Energy Savings Requirement the dwelling unit meets, and (2) whether the dwelling unit was constructed in accordance with the Prevailing Wage and Apprenticeship Requirements. First, projects that meet the ZERH Requirements may claim a higher credit per dwelling unit than regular Energy Star projects. Section 3 below provides more detail about the ZEHR and Energy Star Requirements. Second, projects that meet the Prevailing Wage and Apprenticeship Requirements may claim a higher credit per dwelling unit than non-compliant projects. Table 1 shows the applicable credit amounts for each project type.

2. Eligible Contractor

To qualify for the credit, an eligible contractor must sell or lease the newly constructed dwelling unit to a third-party taxpayer. An eligible contractor is the contractor that owns and has a tax basis in the dwelling unit when the unit is acquired. The eligible contractor is generally the constructor of the dwelling unit. However, in cases where the owner of the unit hires a third-party contractor to complete construction, the owner of the dwelling unit (and not the third-party contractor) is the eligible contractor.

3. Energy Saving Requirements

To satisfy the Energy Saving Requirements, the dwelling unit must meet either the Energy Star Requirements or the ZERH Requirements. Both the Energy Star and ZEHR Requirements are based on standards prescribed by EPA for the applicable category of dwelling unit. EPA separates dwelling units into three categories: (1) single-family homes, (2) multi-family homes, and (3) manufactured homes. A dwelling unit meets the requirements if:

1. The unit satisfies the requirements in the applicable Program Version, and

2. An eligible certifier certifies that the unit satisfies such requirements.

First, an applicable Program Version is the Energy Star or ZERH protocol prescribed by EPA for the dwelling unit category in the relevant taxable year. Table 2 below shows the applicable Program Versions for Energy Star units placed into service in tax years 2023 and 2024. Table 3 below shows the applicable Program Versions for ZERH units placed into service in tax years 2023 and 2024.

Second, an eligible certifier is a person qualified and registered as a certifier under the Energy Star Program (for Energy Star certifications) or ZERH Program (for ZERH certifications). A dwelling unit does not meet the Energy Star Requirements unless an eligible certifier certifies that the unit complies with the applicable Energy Star Program Version of that building category. Similarly, a dwelling unit does not meet the ZERH Requirements unless an eligible certifier certifies that the unit complies with the applicable ZERH Program Version for that building category.

EPA has created regional Energy Star Program Versions in several states. A project that satisfies the regional Energy Star Program Version will be deemed to meet the national standards.

Regional standards information is summarized in Table 2 below. 

In the event that EPA releases a superseding Energy Star or ZERH Program Version, the new version will supplant the old version after three tax years. During this transition period, the IRS will deem any dwelling unit certified under the superseding version as certified under the currently effective version. For example, a dwelling unit certified under the Energy Star Multifamily New Construction National Program Requirements Version 1.2 is also deemed certified under the Energy Star Multifamily New Construction National Program Requirements Version 1.1.

4. Commentary

Notice 2023-65 provides some much-needed clarity to the new Section 45L landscape. Before the IRS published the Notice, several major questions about the new Section 45L existed. Notice 2023-65 closed many of these questions. For example, previous guidance was unclear as to whether dwelling units certified under EPA’s more strenuous regional standards would satisfy the national-level certification. The Notice, however, clarifies that the IRS will deem a dwelling unit certified under a regional standard to have also been certified under the national standard. Similarly, it was unknown how the IRS would treat dwelling units certified under a superseding Program Version, rather than the currently effective version. The Notice eliminates this uncertainty, providing that the IRS will deem any dwelling unit certified under the superseding version to have been certified under the currently effective version.

Although Notice 2023-65 answered many outstanding questions about the new Section 45L, the Notice introduced several new questions as well. For example, the Notice creates confusion about whether SFNH National Version 3.1 or Version 3.2 applies to acquisitions that occur in 2024. Links provided in the Notice state that Version 3.2 becomes effective on January 1, 2024. This is in direct opposition to the text of Section 45L, which provides that SFNH National Version 3.1 applies to acquisitions before January 1, 2025. The statute, not the Notice, should be controlled because the IRS does not have the authority to override Congress. However, this could create unnecessary confusion for taxpayers and examiners if the error is not corrected before taxpayers begin to claim the credit for their 2024 acquisitions.