The 45L tax credit presents a valuable opportunity for residential builders to earn tax savings by constructing energy-efficient dwellings. With credits ranging from $500 to $5,000 per dwelling unit, this incentive offers substantial financial benefits. What's more, these credits can be claimed retroactively for up to three tax years, making it a great way to recover costs on qualifying projects completed in recent years.

Despite its potential, many builders face significant hurdles in claiming the 45L tax credit. These barriers often stem from changing legislation, complex energy efficiency standards, and challenging reporting requirements. In this article, we will explore these obstacles in detail and explain how our comprehensive services help builders navigate these complexities and secure the 45L tax credit with ease.

What is the 45L Tax Credit?

The 45L tax credit is an incentive offered to builders who construct energy-efficient residential homes and have tax basis in the property during construction. To qualify for the credit, dwellings placed in service after 12/31/2022 must meet ENERGY STAR requirements. The amount of the credit depends on the energy savings achieved and prevailing wage requirements met. This credit can be claimed for dwellings that meet these energy efficiency standards during construction and can be applied retroactively for up to three tax years.

For many builders, this presents a lucrative opportunity to reduce their tax burden. However, the process of claiming the credit is not always straightforward, and several barriers often prevent builders from realizing this benefit.

Barriers to Claiming the 45L Tax Credit

1. Navigating Changing Legislation and IRS Regulations

The 45L tax credit is governed by complex and ever-changing tax laws. Legislation affecting tax credits, especially those related to energy efficiency, frequently evolves. This can make it difficult for builders to stay on top of the latest eligibility requirements, application procedures, and IRS regulations. Builders who are not up to date with these changes may miss out on claiming the credit or may make errors in their claims that could lead to audits and penalties.

Understanding and Complying with ENERGY STAR Requirements

In order to qualify for the 45L tax credit, homes placed in service after 12/31/2022 must meet ENERGY STAR requirements. However, the process for meeting these standards can be technically complex and confusing. Many builders struggle to interpret the technical specifications and documentation requirements involved in obtaining ENERGY STAR certification. This leads to the risk of non-compliance or failure to meet the required standards.

Managing Prevailing Wage Reporting Requirements

Multi-family projects placed in service after 12/31/2022 must meet prevailing wage requirements to achieve maximum credit value. These regulations stipulate that construction workers must be paid wages in line with local prevailing wage rates. Managing this reporting and ensuring compliance can be challenging, especially for builders who are unfamiliar with the requirements. 

Substantiating Claims in the Event of an IRS Audit

In the event of an IRS audit, builders must be able to substantiate their claims for the 45L tax credit with comprehensive and accurate documentation. Many builders are concerned about how they will defend their credit claims if audited, especially given the complexities involved in verifying energy efficiency standards, prevailing wage compliance, and other requirements. Without a solid record-keeping system, audits can become costly and time-consuming, potentially leading to the disqualification of the credit or even penalties.

How Our Services Alleviate These Barriers

At Sycamore, we specialize in guiding builders through the complexities of claiming the 45L tax credit. Our team of engineers, CPAs, and tax attorneys work together to provide a comprehensive, end-to-end service that helps you overcome the challenges associated with the 45L tax credit application process.

Here’s how our services address each of the barriers discussed above:

1. Keeping You Up-to-Date with Changing Legislation and IRS Regulations

Navigating the evolving landscape of tax law can be overwhelming, but our experts stay on top of legislative changes and IRS updates related to energy efficiency tax credits. We monitor the latest tax policies and ensure that your claim reflects the most current regulations. Our team takes the guesswork out of the process, ensuring compliance with the latest requirements and maximizing your chances of qualifying for the credit.

2. Simplifying ENERGY STAR Compliance

Understanding and meeting ENERGY STAR certification requirements can be daunting, especially for those who do not have extensive experience with ENERGY Star standards. Our engineering team works directly with you to ensure that your dwellings meet or exceed the necessary energy efficiency benchmarks. We assist with energy audits, testing, and certification, ensuring that your project is compliant and eligible for the 45L credit. We help streamline the technical aspects, so you can focus on what you do best—building homes.

3. Managing Prevailing Wage Reporting

Prevailing wage compliance can be complicated, but our team simplifies the process by handling the administrative burden associated with wage reporting. We use specialized prevailing wage software that streamlines record-keeping and ensures timely reporting. By managing this process for you, we reduce the risk of errors or missed deadlines, ensuring that your project meets all wage compliance requirements and remains eligible for the 45L credit.

4. Substantiating Your Claims in Case of an Audit

In the event of an IRS audit, having solid documentation is essential to defending your 45L claims. We help you prepare and organize all necessary records, including energy audits, certifications, prevailing wage documentation, and other compliance-related materials. Our team ensures that every detail is accurately documented and easily accessible, so if you are audited, we can quickly provide the IRS with the information they need to substantiate your claim.  Our tax attorneys and CPAs will work directly with the IRS on your behalf to defend your claim.

Conclusion

Claiming the 45L tax credit can be a rewarding opportunity for residential builders, but navigating the process can be complicated due to changing regulations, ENERGY STAR compliance, prevailing wage reporting, and the need to substantiate claims in case of an audit. Fortunately, at Sycamore, we provide the expertise and support needed to help you overcome these barriers and claim the credit with confidence.

From staying up-to-date with the latest tax laws to managing complex documentation and ensuring full compliance, our end-to-end service takes the burden off your shoulders and ensures that you can maximize the value of the 45L tax credit. Let us handle the complexities so you can focus on building more energy-efficient homes and growing your business.

Contact us today to learn how we can help you claim the 45L tax credit and take advantage of this valuable tax incentive.