Increased Clean Energy Tax Credit for Homebuilders

Do you remember when people used to say that the world would end in 2012? And some people actually believed it, while most wouldn’t stop talking about it, so much so that a song was released about it.

Ten years have passed since then, and we’re still here. Indeed, the world is not ending soon, but have you noticed how hazy your surroundings have become? Or how the year’s first snow came in late? Or how the summer heat stung a bit worse each passing year?

With everything that’s been going on – Covid-19, economic crisis, climate change, etc. – it wouldn’t be surprising if someone throws in another end-of-the-world prediction, and everybody believes it. If any, it’s more believable now than it was in 2012.

Nonetheless, oxygen’s still accessible, so by sci-fi standards, we still got plenty of time to reverse some of the effects of global warming. Thus, the government continues to push for the clean energy movement, which aims to drive investments toward a cleaner, domestic, and more secure energy future. This advocacy’s call to action is strengthened by incentives like the tax credit granted to contractors building energy-efficient new homes.

What is the Clean Energy Tax Credit?

The clean energy credit is a tax incentive provided under Section 45L of the Internal Revenue Code. Under it, eligible multifamily developers, investors, and homebuilders are rewarded as follows:

• For Site-Built Homes

$2,000 credit if certified to reduce heating and cooling energy consumption by 50% and meet minimum efficiency standards established by the Department of Energy.

• For Manufactured Homes

• $2,000 credit, if the homes conform to Federal Manufactured Home Construction and Safety Standards and meet the energy savings requirements as that of site-built homes
• $1,000 credit if they comply with the Federal Manufactured Home Construction and Safety Standards and reduce energy consumption by 30%, or if they meet ENERGY STAR Labeled Home requirements.

Unfortunately, this incentive expired after 2021…but hold on because we’ve got some good news.

The Inflation Reduction Act Extended and Expanded the Tax Credit

The Inflation Reduction Act (IRA), passed on August 16, 2022, not only extended the credit through 2032 but also expanded and increased its coverage.

Here’s what you should know about the change.

The credit rules under the new law take effect in 2023, so what about 2022?

For this year, the law provided that the old credit rules under Section 45L shall apply, so be sure to keep that in mind for the upcoming tax season.

Depending on the energy efficiency requirements met, a taxpayer may qualify for a tax credit ranging from $500 to $5,000, as opposed to the previous maximum tax credit of $2,000.

• Multifamily Homes

– $500 if the home meets the Energy Star Single Family New Homes Program

– $1,000 when certified as a Zero Energy Ready Home by the Department of Energy

• Single Family and Manufactured Homes

– $2,500 when the home is constructed following the standards of the Energy Star Residential New Construction Program or the Manufactured Homes Program

– $5,000 when certified as a Zero Energy Ready Home by the Department of Energy

Under the IRA, after December 31, 2022, the $500 lifetime limit for the energy-efficient home improvement credit will be removed. Instead, it shall be capped generally at $1,200 per year.

Further, the rate shall be 30% of the sum of qualified expenditures paid by the taxpayer during the year, which include:

• Qualified energy efficiency improvements
• Residential energy property expenditures
• Home energy audits

The credit can only offset your tax liability, and you cannot refund the excess. However, you can carry it over to compensate for your tax liability for the next 20 years.

The Bottom Line:

As of November 2022, around 1.49 million houses have been completed, while about 1.43 million have started construction. Suppose even half of these numbers are energy-efficient homes. In that case, we can look forward to a brighter future, with lower greenhouse gas emissions, reduced water consumption, cheaper individual utility bills, stable electricity prices and volatility, and more.

So let’s all work together in saving the world, one home and tax credit at a time!

Tax season is upon us, and you have to make sure that you’re accounting for all tax credits and deductions available to you. With a lot of information to digest and changes to keep track of, it’s easy to get lost in a pile of tax legislation, regulations, IRS guidelines, and memoranda. Talk to your trusty tax professional to help you navigate this, or download the MBE CPAs app for timely tax alerts and updates!