Contractors who build energy-efficient residential dwellings should be very happy with the budget appropriation legislation recently signed into law. The Tax Extender and Disaster Relief Act of 2019 extended the 45L tax credit. The credit, which had previously expired in 2017, is now available through December 31, 2020.
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The 45L tax credit was not the only energy-efficient tax item to be extended.
What is the 45L credit?
45L is a section of the Internal Revenue Code that provides a tax credit of up to $2,000 for each qualified residential dwelling unit an eligible contractor builds utilizing energy-efficient technology. Residential properties qualified for the credit include single family and multifamily residences with three or fewer above-grade stories.
Who can take advantage of the 45L credit?
45L is a general business credit subject to use after considering tax liability limitations and carryover requirements. The credit is available to any eligible contractor who constructed or substantially rehabilitated an energy-efficient residential dwelling unit in the United States that was used by the owner in a qualifying tax year. There are stated energy-efficient levels to be met, and there is a certification process required, but for those contractors building energy-efficient residential dwelling units as a preferred living space, the credit is just an added benefit to enhance profit potential.
What is the certification process for the 45L credit?
An eligible certifier is defined as someone who is independent of the contractor claiming the 45L credit for an energy efficient residential dwelling, and who has been accredited by an approved rating organization. This individual will certify the units being claimed. The certifier will conduct a study of the project by completing detailed energy-saving calculations and then confirming those calculations by conducting on-site visits for testing.
From this information, a certification package is assembled in which the eligible certifier, under penalty of perjury, states that the facts presented in the certification package are true, correct and complete. The certification package provides confirmation that the residential dwelling being certified has an annual heating and/or cooling consumption at least 50% less than a comparable residential dwelling, and that at least 10% of the 50% savings is from the building envelope.
We worked with a townhome complex owner to obtain the 45L credit. The complex was comprised of 56 units and included energy-efficient mechanical systems and building envelopes. By gathering the necessary information and completing the certification, the client received over $104,000 in credits on their current-year tax return; the maximum credit allowable would have been $112,000 (56 units x $2,000/unit).
Are refunds available for 45L?
The recent extension of the 45L credit was worded so that there was no lapse in the availability to use the 45L credit. The extension covers qualified residential dwelling units built and put in use prior to December 31, 2020. Therefore, claims for refunds or amended returns should be considered, particularly for the tax year 2018.
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