IRS Provides Guidance on New Energy Efficient Home Credit

(Parker Tax Publishing October 2023)

The IRS provided guidance on the new energy efficient home credit under Code Sec. 45L, as amended by the Inflation Reduction Act of 2022 (Pub. L. 117-169). The guidance addresses (1) the person that is eligible for the credit, (2) determining the applicable amount of the credit, (3) energy saving requirements, (4) certification requirements, and (5) substantiation requirements. Notice 2023-65.

Background

Under Code Sec. 45L(a)(1) an eligible contractor is allowed a credit (i.e., the new energy efficient home credit or the Section 45L credit) for the tax year equal to the applicable amount for each qualified new energy efficient home that is constructed by the eligible contractor and acquired by a person from the eligible contractor for use as a residence during the tax year.

The Inflation Reduction Act of 2022 (IRA) (Pub. L. 117-169) amended Code Sec. 45L to retroactively extend the new energy efficient home credit for qualified new energy efficient homes acquired after December 31, 2021, and on or before December 31, 2022. The IRA also amended Code Sec. 45L, effective for qualified new energy efficient homes acquired after December 31, 2022, in various ways. Specifically, the IRA (1) changed the applicable amount of the Section 45L credit determined under Code Sec. 45L(a)(2), (2) set new energy saving requirements under Code Sec. 45L(c), (3) added an exception to the required basis adjustment under Code Sec. 45L(e), (4) added new Code Sec. 45L(g) to provide certain prevailing wage requirements, and (5) extended the Section 45L credit so that it is allowed for qualified new energy efficient homes acquired on or before December 31, 2032.

Under Code Sec. 45L(a)(2), the applicable amount of the Section 45L credit is:

(1) $2,500, in the case of a dwelling unit that is eligible to participate in the Energy Star Residential New Construction Program or the Energy Star Manufactured New Homes Program and meets the energy saving requirements of Code Sec. 45L(c)(1)(A) (and does not meet the requirements of Code Sec. 45L(c)(1)(B));

(2) $5,000, in the case of a dwelling unit that is eligible to participate in the Energy Star Residential New Construction Program or the Energy Star Manufactured New Homes Program and meets the requirements of Code Sec. 45L(c)(1)(B);

(3) $500, in the case of a dwelling unit that is part of a building eligible to participate in the Energy Star Multifamily New Construction Program and meets the energy saving requirements of Code Sec. 45L(c)(1)(A) (and does not meet the requirements of Code Sec. 45L(c)(1)(B)), and

(4) $1,000, in the case of a dwelling unit that is part of a building eligible to participate in the Energy Star Multifamily New Construction Program and meets the requirements of Code Sec. 45L(c)(1)(B).

Code Sec. 45L(g) adds a prevailing wage requirement that increases the amount of the Section 45L credit allowed. In the case of a "qualifying residence" described in Code Sec. 45L(a)(2)(B) (i.e., a dwelling unit which is part of a building eligible to participate in the Energy Star Multifamily New Construction Program) meeting the prevailing wage requirements in Code Sec. 45L(g)(2)(A), the Section 45L credit amount allowed with respect to such residence is: (1) $2,500, in the case of a residence that meets the requirements of Code Sec. 45L(c)(1)(A) (and does not meet the requirements of Code Sec. 45L(c)(1)(B)), and (2) $5,000, in the case of a residence that meets the requirements of Code Sec. 45L(c)(1)(B).

The energy saving requirements that a dwelling unit must meet to be a qualified home are provided in Code Sec. 45L(c). Generally, a dwelling unit meets the energy saving requirements of Code Sec. 45L(c)(1)(A) if such dwelling unit meets the requirements of Code Sec. 45L(c)(2) or (3) (whichever is applicable). A dwelling unit meets the requirements of Code Sec. 45L(c)(1)(B) if such dwelling unit is certified as a "zero energy ready home" under the zero energy ready home program (ZERH program) of the U.S. Department of Energy (DOE) as in effect on January 1, 2023 (or any successor program determined by the IRS).

In October 2022, the IRS published Notice 2022-48, which included a request for comments on the IRA amendments to Code Sec. 45L. In November 2022, the IRS published Notice 2022-61, which contains initial guidance with respect to the prevailing wage requirements under Code Sec. 45L(g). In August 2023, the IRS published proposed regulations in REG-100908-23 relating to the prevailing wage requirements, including under Code Sec. 45L(g).

Notice 2023-65

On September 27, the IRS issued Notice 2023-65, which provides guidance on the new energy efficient home credit under Code Sec. 45L, as amended by the IRA. The guidance provided in the notice addresses (1) the person that is eligible for the credit, (2) determining the applicable amount of the credit, (3) energy saving requirements, (4) certification requirements, and (5) substantiation requirements. The notice also obsoletes Notices 2008-35 and 2008-36, which remain applicable for purposes of pre-2023 Code Sec. 45L.

Who Is Eligible to Claim the Section 45L Credit

The Section 45L credit for the tax year is the applicable amount for each qualified home that is constructed by an eligible contractor and acquired by a person from such eligible contractor after December 31, 2022, and before January 1, 2033, for use as a residence during the tax year for which the taxpayer is claiming the credit under Code Sec. 45L.

The "eligible contractor" is the taxpayer for purposes of the Code Sec. 45L credit. An "eligible contractor" is defined in Section 5.02 of Notice 2023-65 as the person that constructed the qualified home and owned and had a basis in the qualified home during its construction, or, in the case of a qualified home that is a manufactured home, the person that produced such home and owned and had a basis in such home during its production. For example, if a person that owns and has a basis in a qualified home during its construction hires a third-party contractor to construct the home, the person that hires the third-party contractor is the eligible contractor and the third-party contractor is not an eligible contractor.

Under Section 5.01 of Notice 2023-65, the term "acquired" includes purchased. The IRS also will consider a qualified home that is leased by a person from an eligible contractor for use as a residence during the tax years as "acquired" for purposes of Code Sec. 45L(a)(1)(B).

Determining the Applicable Amount of the Section 45L Credit

The Section 45L credit for the tax year is the "applicable amount" for each qualified home that is constructed by an eligible contractor and acquired by a person from such eligible contractor after December 31, 2022, and before January 1, 2033, for use as a residence during the tax year for which the taxpayer is claiming the credit. Section 3 of Notice 2023-65 provides guidance on determining the "applicable amount" of the Section 45L credit.

The applicable amount for a dwelling unit that is eligible to participate in the Energy Star Residential New Construction Program or the Energy Star Manufactured New Homes Program is: (1) $2,500, for a dwelling unit that meets the requirements of Code Sec. 45L(c)(2) and does not meet the ZERH program requirements of Code Sec. 45L(c)(1)(B), or (2) $5,000, for a dwelling unit that meets the ZERH program requirements.

A dwelling unit is eligible to participate in the Energy Star Residential New Construction Program if it meets the eligibility requirements provided for this program on the "About ENERGY STAR - Tax Credits for Home Builders" webpage (Energy Star Webpage) of the Environmental Protection Agency (EPA). A dwelling unit is eligible to participate in the Energy Star Manufactured New Homes Program if it meets the eligibility requirements provided for this program on the Energy Star Webpage.

Generally, the applicable amount for a dwelling unit that is part of a building eligible to participate in the Energy Star Multifamily New Construction Program is: (1) $500, for a dwelling unit that meets the requirements of Code Sec. 45L(c)(3) and does not meet the ZERH program requirements of Code Sec. 45L(c)(1)(B), or (2) $1,000, for a dwelling unit that meets the ZERH program requirements.

A dwelling unit is part of a building eligible to participate in the Energy Star Multifamily New Construction Program if the building meets the eligibility requirements provided for this program on the Energy Star Webpage.

In the case of a dwelling unit that is part of a building eligible to participate in the Energy Star Multifamily New Construction Program and that meets the requirements of Code Sec. 45L(c)(3) (and does not meet the ZERH program requirements of Code Sec. 45L(c)(1)(B)) and the prevailing wage requirements of Code Sec. 45L(g)(2)(A), the applicable amount is $2,500. In the case of a dwelling unit that is part of a building eligible to participate in the Energy Star Multifamily New Construction Program and that meets the ZERH program requirements and the prevailing wage requirements, the applicable amount is $5,000. Guidance on the prevailing wage requirements is provided in Notice 2022-61 and in the proposed regulations published in REG-100908-23.

Energy Saving Requirements

To meet the energy saving requirements of Code Sec. 45L(c), a dwelling unit must meet the single-family home requirements of Code Sec. 45L(c)(2) or the multifamily home requirements of Code Sec. 45L(c)(3) (whichever is applicable), or meet the zero energy ready home requirements of Code Sec. 45L(c)(1)(B). Section 4 of Notice 2023-65 provides guidance on the energy saving requirements.

A dwelling meets the single-family home energy saving requirements of Code Sec. 45L(c)(2) if:

(1) in the case of a dwelling unit acquired before January 1, 2025, the dwelling unit meets the Energy Star Single-Family New Homes National Program Requirements 3.1, and the most recent Energy Star Single-Family New Homes Program Requirements applicable to the location of such dwelling unit (as in effect on the later of January 1, 2023, or January 1 of two calendar years prior to the date the dwelling unit was acquired);

(2) in the case of a dwelling unit acquired after December 31, 2024, the dwelling unit meets the Energy Star Single-Family New Homes National Program Requirements 3.2, and the most recent Energy Star Single-Family New Homes Program Requirements applicable to the location of such dwelling unit (as in effect on the later of January 1, 2023, or January 1 of two calendar years prior to the date the dwelling unit was acquired); or

(3) the dwelling unit meets the most recent Energy Star Manufactured Home National Program Requirements as in effect on the later of January 1, 2023, or January 1 of two calendar years prior to the date such dwelling unit is acquired.

As provided on the Energy Star Webpage, the Energy Star Single-Family New Homes National Program Requirements 3.1 and 3.2, the Energy Star Single-Family New Homes Program Requirements applicable to the location of such dwelling unit, and the Energy Star Manufactured Home National Program Requirements (together, the Energy Star Single-Family Home Program Requirements) each require a dwelling unit to be certified as part of meeting such requirements. A dwelling unit will be considered to meet these respective program requirements for purposes of Code Sec. 45L(c)(2) if it is certified under the rules of such respective program requirements (see below).

A dwelling unit meets the multifamily home energy saving requirements of Code Sec. 45L(c)(3) if such dwelling unit meets:

(1) the most recent Energy Star Multifamily New Construction National Program Requirements (as in effect on either January 1, 2023, or January 1 of three calendar years prior to the date the dwelling unit was acquired, whichever is later); and

(2) the most recent Energy Star Multifamily New Construction Regional Program Requirements applicable to the location of such dwelling unit (as in effect on either January 1, 2023, or January 1 of three calendar years prior to the date the dwelling unit was acquired, whichever is later).

As provided on the Energy Star Webpage, the Energy Star Multifamily New Construction National Program Requirements and the Energy Star Multifamily New Construction Regional Program Requirements applicable to the location of such dwelling unit (together, the Energy Star Multifamily Home Program Requirements) each require a dwelling unit to be certified as part of meeting such requirements. A dwelling unit will be considered to meet these respective program requirements for purposes of Code Sec. 45L(c)(3) if it is certified under the rules of such respective program requirements.

A dwelling unit meets the zero energy ready home requirements under Code Sec. 45L(c)(1)(B) if such dwelling unit is certified as a zero energy ready home under the ZERH program established by the DOE as in effect on January 1, 2023 (or any successor program determined by the IRS). ZERH program requirements, including effective dates and certification requirements by building type, are provided on the DOE webpage, "DOE Zero Energy Ready Home (ZERH) Program Requirements" (ZERH Webpage).

For purposes of establishing that the ZERH program is in effect under Code Sec. 45L(c)(1)(B), the IRS has determined: (1) that the program identified on the ZERH Webpage (or any successor DOE webpage) is in effect and that successor ZERH programs will be in effect as of the date indicated on the ZERH Webpage (or any successor DOE webpage), and (2) that should the DOE cease identifying ZERH programs on the DOE webpage and instead provide successor ZERH programs in an alternative, publicly available DOE source, that successor ZERH programs will be in effect as of the date indicated in the alternative, publicly available DOE source.

Example: A dwelling unit is certified on December 23, 2023, in accordance with Section 6 of Notice 2023-65 as a zero energy ready home under the ZERH program in effect on January 1, 2023 (as provided on the ZERH Webpage, and as determined by the effective dates provided under Section 4.04 of Notice 2023-65). The eligible contractor sells the dwelling unit to a person for use as a residence on July 30, 2024. Under these facts, the dwelling unit meets the energy saving requirements of Code Sec. 45L(c)(1)(B).

Certification

Section 6 of Notice 2023-65 provides that an eligible contractor must obtain any certification described in Code Sec. 45L(c)(1) and Sections 4.02(2), 4.03(2), and 4.04(1) of Notice 2023-65 with respect to a dwelling unit before claiming the Code Sec. 45L credit. An eligible contractor is not required to file the certification with the return on which the credit is claimed, but should keep the certification as required under Code Sec. 6001. An eligible contractor must follow any procedures outlined in guidance and applicable forms and instructions provided by the IRS with respect to Code Sec. 45L.

Certification requirements for the effective Energy Star program are provided on the Energy Star webpage. Certification requirements for the effective ZERH program are provided on the ZERH webpage.

Observation: For purposes of the credit requirements in place prior to the enactment of the IRA, Notices 2008-35 and 2008-36 provide that a certification must be prepared by an "eligible certifier." The notices also include rules for approved software that may be used to calculated energy consumption for purposes of providing a certification. Those notices do not apply for purposes of any qualified homes acquired after December 31, 2022. For purposes of preparing the certification required under Energy Star and ZERH program requirements for qualified homes acquired after December 31, 2022, rules for the person eligible to issue a certification, and for the software to be used of purposes of providing a certification, are under the respective Energy Star and ZERH program requirements.

Under a safe harbor provided in Section 6.06 of Notice 2023-65, the IRS will deem a dwelling unit to meet any certification requirements under Code Sec. 45L(d) if:

(1) in the case of a dwelling unit that meets the requirements of Code Sec. 45L(c)(1)(A), it is certified under the rules of the Energy Star program requirements as provided in Section 6.02 of Notice 2023-65, or

(2) in the case of a dwelling unit that meets the requirements of Code Sec. 45L(c)(1)(B), it is certified as a zero energy ready home under the ZERH program as provided in Section 6.03 of Notice 2023-65.

Substantiation

Section 7 of Notice 2023-65 describes the recordkeeping requirements that an eligible contractor must meet in order to substantiate that the requirements of Code Sec. 45L have been met. In addition, a safe harbor is provided in the case of a sale of a manufactured home by an eligible contractor to a dealer of manufactured homes. Specifically, the eligible contractor may rely on a statement by the dealer to establish the date on which a manufactured home was acquired, that is located in the United States, and that it was acquired for use as a residence, if the eligible contractor retains the statement in accordance with the recordkeeping requirements of Code Sec. 6001 and Section 7.01 of Notice 2023-65.

For a discussion of the new energy efficient home credit, see Parker Tax ¶107,801.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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