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Home Builders Have New Tax Credit

U.S. home builders have new motivation to build energy-efficient homes. The Energy Policy Act of 2005 included many provisions regarding coal, natural gas, renewable energy and energy efficiency and distribution. It also enacted a new tax credit under IRC section 45L-the energy-efficient home credit-available to eligible contractors. Depending on the energy savings achieved, the credit is $1,000 or $2,000 per home. CPAs should become familiar with the credit to claim it for eligible clients.

Under section 45L, a home qualifies for the credit if it has all the following characteristics:

  • It's located in the United States.
  • Its construction was substantially completed after August 8, 2005.
  • It meets the energy-saving requirement specified in section 45L.
  • It is acquired from an eligible contractor in either 2006 or 2007 for use as a residence.

The service issued IR news release 2006-32 and notices 2006-27 and -28 to explain how homebuilders can qualify newly constructed homes for the credit. They include information about the certification process a builder must undergo to qualify and a public list of software programs that can help calculate energy consumption to obtain the proper certification.

Energy savings. Generally, a manufactured home must be certified to provide an energy-consumption level for heating and cooling at least 30% to 50% (50% for other homes) below that of a comparable home constructed under current energy standards. It also must have exterior improvements that provide an energy-consumption level at least 10% below that of a comparable home. If a manufactured home cannot meet the 50% threshold, the credit is reduced from $2,000 to $1,000 if a 30% energy-efficiency standard is met.

Certification. An eligible contractor must obtain a manufactured home certification from an eligible certifier before claiming the $2,000 credit; see section 45L(c) and notices 2006-27 and -28. A contractor need not attach the certification to the return on which the credit is claimed. However, a taxpayer must maintain books and records sufficient to establish entitlement to (and amount of) any deduction claimed. Thus, a contractor claiming a $2,000 credit should retain the certification as part of its books and records.

An eligible certifier is a person, not related to the contractor, who has been accredited or otherwise authorized by the Residential Energy Services Network (RESNET) or an equivalent rating network to use energy-performance measurement methods approved by RESNET (or the equivalent rating network).

Notice 2006-28 provides procedures for manufactured homes; notice 2006-27 for all other homes.

The credit is reported by the taxable entity or, for pass-through entities (for example, S corporations and partnerships), on the shareholder's or partner's individual return. It cannot be applied against the alternative minimum tax; thus, it may be limited and carried forward. It is not refundable.

CPAs should plan ahead with clients in the home construction business. The credit can be significant; thus, obtaining the proper certification is important. For more information, see Tax Clinic, "Tax Credit for Home Builders," by Joel Ackerman, CPA, in the October 2006 issue of The Tax Adviser.

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