The 45L credit, initially introduced as a deduction, has evolved into a valuable credit and source of financing for affordable housing projects, particularly those utilizing the LIHTC program. This transformation has occurred through legislative changes and increased recognition of the credit’s potential to incentivize energy-efficient construction in multifamily developments.
Here’s how this transition has occurred:
Origins as a Deduction
The 45L credit was initially introduced as a tax deduction under the Energy Policy Act of 2005. Initially, it allowed developers of energy-efficient residential properties, including multifamily buildings, to claim a deduction of up to $2,000 per unit for eligible construction or rehabilitation projects meeting specific energy-efficiency criteria.
Transition to a Valuable Credit
Policymakers recognized the limitations of the deduction approach in fully incentivizing energy-efficient construction, especially for affordable housing projects with tight budgets and in need of gap financing. In response, legislative efforts were made to convert the 45L deduction into a valuable tax credit. The Consolidated Appropriations Act of 2021 included provisions to convert the 45L deduction into a tax credit retroactively for projects completed after Dec. 31, 2017, through Dec. 31, 2021. This change significantly enhanced the attractiveness of the credit, as tax credits provide a dollar-for-dollar reduction in tax liability, unlike deductions, which reduce taxable income.
Impact on LIHTC Multifamily Developments
The conversion of the 45L credit from a deduction to a credit has had a particularly notable impact on LIHTC multifamily developments. LIHTC projects already involve complex financing structures and stringent requirements to build and preserve affordable units. The availability of the 45L credit as a dollar-for-dollar reduction in tax liability provides LIHTC developers with an additional source of financing, which can be crucial for projects in need of gap financing and operating on tight margins. Incorporating energy-efficient features into their developments to qualify for the 45L credit, LIHTC developers can not only benefit from the tax credits and additional gap financing but also from the utility operating expense savings as a result. The conversion of the 45L credit into a valuable financing tool has served to incentivize energy-efficient construction practices in affordable housing projects. Developers are more inclined to invest in energy-efficient building materials, equipment, and design strategies to qualify for the credit, leading to long-term energy savings and environmental benefits.
