There Are No Credits Like Energy Credits

With the signing of the Inflation Reduction Act of 2022, the Energy Efficient Home Improvement Credit, previously known as the Nonbusiness Energy Property credit, and the Residential Clean Energy Credit were revived and expanded.

Energy Efficient Home Improvement Credit

The Energy Efficient Home Improvement Credit is applicable only to your primary residence. The credit amount is 30% of the costs of the following improvements, and needs to meet the highest tier of efficiency as established by the Consortium for Energy Efficiency:

  • Residential Energy Property
    • $1,200 cap for energy property costs including central air conditioners, water heaters, and hot water boilers; includes labor for installation.
  • Heat Pumps, Biomass Stoves, and Boilers
    • $2,000 cap; includes labor for installation.
  • Building Envelope Components
    • Exterior Doors – Capped at $250 per door and $500 total.
    • Windows – Capped at $600.
  • Home Energy Audits
    • Capped at $150.

Along with the expansion of the credit, the $500 lifetime credit is no longer applicable as of January 1, 2023. So, even if you have received $500 in the past related to your personal residence, you can now qualify for the new expanded credit.

Residential Clean Energy Credit

The Residential Clean Energy Credit is applicable to your primary residence and secondary home. The credit amount is 30% of the costs of the following improvements:

  • Solar electric property
  • Solar water heating property
  • Geothermal heat pumps
  • Fuel cells
  • Battery storage technology

These energy credits are nonrefundable, and any amount not used in the current year will be carried forward. 

Claiming the Credit

To claim the credit, provide your tax professional with a vendor itemized list of property that was purchased, including the amount paid, and confirmation of installation before the end of the tax year.

Clean Vehicle Credits

The Inflation Reduction Act of 2022 also expanded the New Clean Vehicle Credit and introduced the Used Clean Vehicle Credit. Both credits are nonrefundable, any amount not used in the current year will be carried forward and are only for purchases beginning in 2023. Purchases must be from a dealer, for primary use in the U.S., and must not be for the purpose of resale.

The New Clean Vehicle Credit amount is limited to $7,500 and must meet the following qualifications:

  • The taxpayer’s adjusted gross income thresholds may not exceed $150,000 for single filers and $300,000 for married filing jointly.
  • For vehicles placed in service from January 1 to April 17, 2023, the credit base amount is $2,500 with $417 for battery capacity of at least 7 kilowatt hours and an additional $417 for each kilowatt hour of battery capacity beyond 5 kilowatt hours.
  • For vehicles placed in service from April 18, 2023, and after, the credit is $3,750 if critical mineral requirements are met and another $3,750 if battery component requirements are met.

The Used Clean Vehicle Credit amount is 30% of the sales price up to a maximum amount of $4,000 and must meet the following qualifications:

  • The taxpayer must not be the original owner.
  • The taxpayer must not be claimed as a dependent on another person’s tax return.
  • The taxpayer must not have claimed another used clean vehicle credit in the 3 years before the purchase date.
  • The taxpayer’s adjusted gross income thresholds may not exceed $75,000 for single filers and $150,000 for married filing jointly.

Qualified Vehicles:

  • Have a sale price of $25,000 or less.
  • Have a model year at least 2 years earlier than the calendar year when you buy it. For example, a vehicle purchased in 2023 would need a model year of 2021 or older.
  • Must not have been transferred to a qualified buyer after August 16, 2022.

Claiming the Credit

Taxpayers must use the U.S. Department of Energy website, https://fueleconomy.gov/feg/tax2023.shtml, to confirm the qualification of a vehicle. Taxpayers must also confirm that the seller reported the information, name, and social security number of the buyer to the IRS and provide the Motor Vehicle Purchase Agreement.

If you have any questions on any of these credits, speak with your tax professional at KT to see how it may benefit you.

October 9, 2023

Building Up the Section 45L Energy Credit

WRITTEN BY BRIAN PEREIRA

What is Section 45L?

Section 45L of the Internal Revenue Code provides a tax credit (dollar for dollar savings on any tax liability) for qualified residential properties. The credit was set to expire on December 31, 2021, however, through the Inflation Reduction Act, the credit has been extended through December 31, 2032.

Residential properties that may qualify for the credit are single and multifamily properties that meet certain energy requirements. The incentive provides a tax credit of up to $2,000 per dwelling unit placed into service prior to 12/31/2022, and a credit of up to $5,000 per dwelling unit placed into service between 1/1/2023 and 12/31/2032.

Is this credit for you?

Eligible contractors, as defined by the IRS, who construct or substantially renovate residential dwelling units within the United States are eligible for the credit. There is no credit limit amount that you can apply for or limit to the number of times that you can claim the credit.

Developers that are involved with affordable housing projects can claim the Section 45L credit along with the Low-Income Housing Tax Credit (LIHTC) without lowering the basis in the LIHTC.

Advantages of the credit

Section 45L gives developers the opportunity to offset the costs associated with energy-efficient residences. Additional benefits include:

  • Building sustainable homes for the community.
  • Increased marketability.
  • Opportunity to minimize tax liability.
  • Ability to offset costs for energy-efficient building materials.

What are the new requirements?

Prior to 2023, developers had to meet the 2006 International Energy Conservation Code standards and were also subject to a three-story limitation on the height of the building.

Beginning in 2023, the available credit amounts vary based on the types of property (single family or multifamily) and the type of certification. The new standards to meet are either the Energy Star or Zero Energy Ready Home (ZERH). For developers of multifamily properties, they can earn higher credits by meeting prevailing wages (PW). The chart below illustrates how these factors affect the credits.

Home TypeEnergy StarEnergy Star with PWZERHZERH with PW
Single Family$ 2,500.00$                  2,500.00$ 5,000.00$    5,000.00
Multifamily$     500.00$                  2,500.00$ 1,000.00$    5,000.00

Additionally, the three-story limitation has been removed.

Who certifies the dwelling unit?

A site visit is conducted by a qualified individual, who has been licensed as a Professional Engineer or as a Registered Architect, to study the eligible unit(s). The individual uses software that has been approved by the Department of Energy (DOE) to calculate the energy savings over the applicable energy standards.

If a project is pursuing DOE ZERH certification, additional reporting is required.

Is Section 45L worth it?

According to an Elevate Rapid City housing study done in 2022, it is projected that the Rapid City region will need a net addition of about 2,979 – 4,021 rental units and 6,084 – 7,149 ownership units. This presents a real opportunity to serve the community with sustainable housing while receiving a tax credit.

If you are interested in the Section 45L credit, speak with your tax professional at Ketel Thorstenson to see how it may benefit you.

June 20, 2023