Tax Credit for Home Builders

Some builders around the country have a new incentive to build energy-efficient homes. Last year, President Bush signed into law the U.S. Energy Policy Act of 2005 (EPA ’05), which included a myriad of energy-related provisions regarding coal, natural gas, renewable energy and energy efficiency and distribution. Also included was a tax credit under Sec. 45L—the new energy efficient home credit—available to eligible contractors. Depending on the energy savings achieved, the credit is either $1,000 or $2,000 per home.

According to Sec. 45L, a home qualifies for the credit if:

• It is located in the U.S.;

• Its construction is substantially completed after Aug. 8, 2005;

• It meets the statutory energy-saving requirements; and

• It is acquired from an eligible contractor in either 2006 or 2007, for use as a residence.

IRS Guidance

The Service issued IR News Release 2006-32 and Notices 2006-27 and -28 to provide guidance on how homebuilders can qualify newly constructed homes for the credit. Among other things, it provides information about the certification process that a builder must complete to qualify for the credit, and a public list of software programs that may be used by home builders in calculating energy consumption to obtain the proper certification.

Energy savings: In general, to meet the energy-saving requirements, a manufactured home must be certified to provide a level of energy consumption for heating and cooling that is at least 30% to 50% (50% for other homes) below that of a comparable home constructed in accordance with current energy standards. Also, it must have exterior improvements providing a level of heating and cooling energy consumption at least 10% below that of a comparable home. For manufactured homes that 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 energy-efficient home credit; see Sec. 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, taxpayers must maintain such books and records as are sufficient to establish the entitlement to, and amount of, any deduction claimed. Accordingly, a contractor claiming a $2,000 credit should retain the certification as part of the contractor’s records.

According to the notices, 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 2006-27 provides procedures for other than manufactured homes; Notice 2006-28, for manufactured homes.

Reporting the Credit

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

For taxpayers not subject to the AMT, there is no limit to the number of $2,000 tax credits a builder can receive. Thus, a builder constructing 100 new homes in one year could theoretically claim a $200,000 credit.

Recommendation

Tax advisers should plan ahead with clients in the home construction business. The credit can be significant for clients; thus, obtaining the proper certification is important.

From Joel Ackerman, CPA, MST, Holtz Rubenstein Reminick LLP, Long Island, NY