Get Up to $5,000 Per Unit in Tax Savings with the 45L Credit

At a glance:

• The main takeaway: The 45L tax credit was expanded through 2032 under the Inflation Reduction Act and can give energy-efficient developers a golden opportunity to boost their bottom line.
• Impact on your business: In this article, we take a deep dive into the conditions associated with the 45L credit, as well as potential penalties for breaking IRS rules.
• Next steps: Rely on Aprio’s Affordable Housing team for help with assessing your eligibility and claiming the 45L tax credit.

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The full story:

With the passage of the Inflation Reduction Act in 2022, the 45L credit was updated, which could allow many developers with energy-efficient properties built or acquired before December 31, 2032, to claim up to $5,000 per unit in tax credits. To recap, developers may be eligible for the credit if they:

• Comply with the U.S. Department of Energy (DOE)’s Zero Energy Ready Home Program or Energy Star Multifamily Program Requirements.
• Own energy-efficient units of any size (there is no height requirement).
• Adhere to prevailing wage requirements.

For a closer look at the preliminary requirements above and a comparison of the old 45L credit with the newly updated credit, read our first article on the topic here. Today, we’ll focus on taking a more in-depth look at the 45L credit conditions and criteria, as well as potential penalties for breaking IRS rules.

Potential amounts under the 45L tax credit, plus prevailing wages

Affordable housing developers may be able to secure a higher tax credit depending on the amount of energy savings their units generate, but the general thresholds for the credit include:

• $500 base credit for meeting the Energy Star Multifamily National and Regional Program Requirements.
• $1,000 base credit for meeting the DOE’s Zero Energy Ready Home Program Requirements.
• 5x boost to each tax credit if the unit meets prevailing wage requirements.

To benefit from the full 45L tax credit, developers must employ their workers at wages paid no less than the prevailing wages for their specific locality. A worker who performs any type of labor for a unit would be considered “employed” by the developer, irrespective of their classification as an employee or independent contractor.

The requirement to pay prevailing wages applies to any work employees perform at the location of the facility/unit, as well as any secondary worksite. The requirement also applies to subcontractors, and developers are responsible for ensuring all appropriate amounts are paid out — otherwise they will miss out on their opportunity to earn the full 45L tax credit.

Other eligibility criteria for the 45L tax credit

• Grandfathered projects: Certain development projects that started construction before January 30, 2023, will be grandfathered into higher credit amounts without using prevailing wages.
  • Physical work test: To be eligible for the grandfathered 45L tax credit, developers must adhere to the physical work test, which means construction on the unit begins when significant physical work starts. A continuous construction program is required for validity and excludes both the effort and cost associated with preliminary activities, such as planning and financing.

How to claim the 45L tax credit

Developers can claim the 45L tax credit with their tax return for the year in which the unit was leased up. The 45L credit is shown on Form 8908, Line 15F of the Schedule K, and Line 15P of the Schedule K-1. Note that developers cannot use the 45L tax credit to offset their alternative minimum tax (AMT), and that the credit is limited to 75% of tax liability.

The bottom line

Ready to assess your eligibility and apply for the 45L tax credit? Aprio’s dedicated team of 100+ affordable housing CPAs serves clients across the nation, and our partners average 20+ years of industry-specific experience. We provide comprehensive solutions and proactive service to advance the business objectives of affordable housing developers from pre-construction to exit, while helping them make the most out of lucrative tax opportunities.

Click here to schedule a consultation with our team today.

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The Inflation Reduction Act Expanded the 45L Credit for Affordable Housing Developers. Here’s How to Take Action