IRS Releases Section 45L Interim Guidance

The IRS recently released guidance on Section 45L of the Internal Revenue Code (IRC) in the form of Notice 2023-65.

This notice clarifies several items contained in the Inflation Reduction Act. The effective date for the guidance is for tax years ending after September 27, 2023. The guidance may also be applied retroactively and can be relied upon if all aspects of the notice are applied.

Qualifying homes first acquired in an open tax year and prior to January 1, 2023 remain eligible for the §45L credit of $2,000 under the original rules established by The Energy Policy Act of 2005.

Section 45L applies to those constructing or renovating residential properties, both for sale and lease.

Background on Section 45L

The Inflation Reduction Act, signed into law by President Biden, extended the Section 45L credit, in its prior form, through December 31, 2022.

The Inflation Reduction Act also extended 45L through December 31, 2032, moving from the 2006 International Energy Conservation Code (IECC) to the applicable ENERGY STAR standard(s).

What does it mean to meet ENERGY STAR Program Requirements?

The Inflation Reduction Act references two separate 45L credit tiers:

• For homes “eligible to participate” in the applicable ENERGY STAR program, the credit is either $500 or $2,500, depending on the property type and if certain labor provisions or safe harbors are met.
• For homes certified under the Department of Energy’s Zero Energy Ready Home (ZERH) Program, an enhanced credit of either $1,000 or $5,000 is available, depending on the property type and if certain labor provisions or safe harbors are met.

This recent guidance clarifies the terms “eligible to participate” and “meets the program requirements” to mean that a home must be certified under the applicable ENERGY STAR standard.

What are the national and regional program requirements with 45L?

In order to meet the ENERGY STAR Program Requirements (certification), qualified homes must meet both the national and regional program requirements. These regional requirements generally apply to homes in Hawaii, Washington, Oregon, California and Florida.

How to Apply the New Section 45L Guidance

Pending additional guidance, the cost to certify a home under the applicable ENERGY STAR guidelines, absent other variables, may often outweigh the value of the 45L tax credit.

Residential builders or developers applying for the credit should consider consulting an energy rating company and a tax advisor to assist with the credit.