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Residential real estate developers have faced significant challenges in the past year. The fallout from recent banking crises has limited lending practices, and high interest rates have made it even harder to secure financing. As a result, the real estate industry has experienced a noticeable slowdown, with fewer projects being developed. However, an updated tax credit offers a silver lining.
Toward the end of 2022, the government passed the Inflation Reduction Act (IRA). To reduce energy consumption, the IRA rolled out $37 billion in green provisions—one of them being the expansion of the Section 45L Energy Efficiency Home Credit.
Serving as a lucrative incentive for residential homebuilders and multi-family developers, it provides a per-dwelling tax credit, which can offer builders hope during a challenging time.
Let’s examine the details of the 45L credit expansion.
What Are the Updates?
The 45L tax credit offers developers a range of potential tax credits, ranging from $1,000 to $5,000 per house or apartment unit. Since it is classified as a credit, 45L is powerful given that it is equivalent to a dollar-for-dollar tax reduction, like using dollars to pay for one’s tax liability.
Eligibility for the credit is dependent upon compliance with energy standards dictated by the Environmental Protection Agency along with the Department of Energy and the Internal Revenue Service.
In addition, maximizing the credit at the $5,000 denomination requires the meeting of certain minimum wage requirements—the labor being used in the building of the entity. Accordingly, it is important that prevailing market rates for wages are paid to contractors or employees associated with the building.
Although this credit expansion is relatively new, many real estate developers have already successfully implemented it in numerous residential real estate conversions, with a potential of several millions of dollars being received as credits to the taxpayer. It is important to highlight that once all statistics are gathered regarding efficiency savings, that data must be further scrutinized and audited by a third-party independent engineering firm, ensuring accuracy and reliability.
Reasons to Work with a Professional
Given the complex nature of the newly amended Section 45L tax credit and the lack of current IRS guidelines, it would be unwise to attempt to navigate this process independently. Such an endeavor could expose you to potential mistakes and unwanted scrutiny from the IRS.
Therefore, it is crucial to engage the services of a seasoned tax professional, one who understands the nuances of this tax credit and possesses the necessary network to guide you through the process. This approach ensures you remain compliant and allows you to maximize the benefits from this tax credit to which you are entitled.
If you want to learn more about the Section 45L tax credit, or if you are ready to initiate the process, please contact us.
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CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).