Not just for home owners....

1. 45L tax credit:
not just for home contractors
On December 17, 2010 President Obama signed into law
the Tax Relief, Unemployment Insurance Reauthorization,
and Job Creation Act of 2010 (the 2010 Tax Bill). This
legislation extended the New Energy Efficient Home Tax
Credit under Code Section 45L through the end of 2011. The
Code Section 45L credit is the applicable amount for each
qualified new energy efficient home which is constructed
by an eligible contractor, and acquired by a person from
the eligible contractor for use as a residence during the tax
year. With today’s energy efficient building trends and the
fact that the 45L benchmark is based on earlier standards,
most current homes do exceed the standards and qualify.
The credit is generally $2,000 for a qualifying residence contractor and not the third party contractor. A “person”
that: can be an individual, a trust, an estate, a partnership, an
association, a company or a corporation.
• Is located in the United States,
Another requirement to be eligible for the 45L credit is that
• was substantially completed after August 8, 2005 and
the home is a “dwelling” unit. A dwelling unit is a single
before December 31, 2011, and
unit providing complete independent living facilities for one
• meets the energy savings requirements of Code Section or more persons, including permanent provisions for living,
45L(c). To meet this requirement, the dwelling must sleeping, eating cooking and sanitation within a building that
generally be certified in accordance with guidance is not more than three stories above grade in height. Based
prescribed by the IRS to have a projected level of annual on this definition the units within an apartment building or
heating and cooling energy consumption that meets condominium, a houseboat or house trailer might qualify
the standards for a 50% reduction in energy usage. for the 45L credit as well as a traditional home. There is
no requirement in Code Section 45L that the property be
For purposes of the new energy efficient home credit,
the person’s principal residence. Thus, assuming the other
construction includes substantial reconstruction and
requirements of Code Section 45L are satisfied, vacation
rehabilitation. The credit is claimed by the “eligible
homes might qualify for the credit.
contractor.” For purposes of the 45L tax credit, an eligible
contractor is the person who constructed the qualified new The Internal Revenue Code generally provides for a one-
energy efficient home. A person must own and have a basis year carry back and 20-year carry forward for the current
in the qualified energy efficient home during its construction year unused business credits. However, for an Eligible
to qualify as an eligible contractor with respect to the Small Business (ESB) credit generated in 2010, the carry
home. For example, if a person that hires a third party back period is five years rather than one year. However, no
contractor to construct the home owns and has the basis in credits attributable to energy efficient homes can be carried
the home during its construction, that person is the eligible

2. back to any tax year ending on or before the effective date With the Small Business Job Act of 2010, ESB credits
of the new energy credit. Since the credit was not allowable incurred in 2010 are not subject to the AMT limitation
until the 2006 tax year, this effectively limits the carry back as stipulated above. For purposes of Code Sec. 38(c)
for a 45L credit generated in 2010 to 4 years. including the rules permitting ESB credits determined for
tax years beginning in 2010 to be used to offset the AMT,
To illustrate the potential impact of the 45L credit for the an ESB is, with respect to any tax year: a corporation the
owner of an apartment building, assume the following facts: stock of which is not publicly traded, a partnership, or a
ABC Company, LLC had an apartment complex constructed sole proprietorship, if the average annual gross receipts
that was completed in October of 2010. The complex is of the corporation, partnership, or sole proprietorship for
three stories tall and has 950 units within the building. ABC the three-tax-year period preceding the tax year does not
Company, LLC owned the property during the construction exceed $50,000,000. If such 45L credit generated in 2010
of the apartment building and is therefore considered the qualifies as an ESB credit, the tentative minimum tax is
“eligible contractor.” Assuming the 50% energy reduction treated as being zero. Therefore, the ESB credit can offset
requirements are satisfied and 800 units are occupied both the regular and AMT liability. In the example above,
as of December 31, 2010, the potential tax credit for ABC if the credit was generated in 2010 as opposed to 2009,
Company, LLC would be $1,600,000 (800 units * $2,000 per the entire $20,000 could have been used to offset both the
unit). Even though the apartment was completed in 2010 regular tax and tentative minimum tax.
with 950 units available, it is limited to the 800 occupied
units as the dwelling needs to be used as a residence in As part of the New Energy Efficient Home Tax Credit under
order to qualify. The depreciable basis of the apartment Code Section 45L, a $1,000 credit is also available for an
building would be reduced by $1,600,000. eligible contractor with respect to a manufactured home.
The manufactured home must have a projected level of
Eligible contractors use Form 8908 to claim a credit for each annual heating and cooling energy consumption that is at
qualified energy efficient home sold during the year. The least 30% below the annual level of heating and cooling
eligible contractor reports the amount of the current year energy consumption of a reference dwelling unit in the
credit shown on Line 4 of Form 8908 and on line 1p of Form same climate zone. It must also conform to the Federal
3800 to determine the amount of his allowable general Manufactured Home Construction and Safety Standards.
business credit for the tax year. Being a credit, it has the
potential to lower taxes dollar for dollar. Under the Small For further information, please contact your Dixon Hughes
Business Jobs Act of 2010, the potential benefit of the 45L Goodman tax advisor or Stuart Nofsinger at
credit can be larger than in prior years for an eligible small stuart.nofsinger@dhgllp.com
business. Prior to 2010, the majority of business credits
reported on Form 3800 were not allowable as a credit to
offset the Alternative Minimum Tax (AMT). For example, if an about dixon hughes Goodman:
individual had a 45L credit in 2009 in the amount of $20,000, Dixon Hughes Goodman is the largest accounting firm
his regular tax was $80,000 and the tentative minimum based in the Southern U.S. and among the nation’s top
tax was $78,000, only $2,000 of the 45L credit would have 15. With a staff of over 1700 located in eleven states and
been allowed in 2009 (the difference between the regular Washington DC, the firm provides a wide array of assurance,
tax and tentative minimum tax). The $18,000 unused 45L tax and consulting services to clients of all sizes. For more
credit could be carried back one year and carried forward information, visit www.dhgllp.com.
for 20 years to offset other year’s taxes, but it would still be
subject to the AMT limitation.
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