Act Section 13301 (Act Page 346) (IRC Sec. 25C)
The nonbusiness energy credit had previously expired on 12/31/2021. The Act now makes the expiration date 12/31/2032 and changes the name to “Energy Efficient Home Improvement Credit”. The Act does away with the lifetime limit on a home for energy efficient improvements and replaces it with an annual $1,200 limit discussed below.
The credit rate increases to 30% from 10% with a new annual limit of $1,200 (previously $500 lifetime). The credit for efficient windows and skylights was increased to $600 from $200 and exterior doors goes to $250 each ($500 maximum) per year so staggering remodeling over several years will greatly increase the benefits.
The biggest change in home improvements is the credit for energy efficient (electric or natural gas) heat pumps, heat pump water heaters, central air conditioners, woodstoves (biomass) and natural gas or oil furnace or boilers, going from $150 to $2,000 annually, and the $1,200 limit is waived. Additionally, roofs and fans no longer qualify for the credit (Page 348)!
In IR-2022-225 the IRS clarified the following:
There is a $1,200 aggregate yearly tax credit maximum for all building envelope components, home energy audits, and energy property. Electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves and biomass boilers have a separate aggregate yearly credit limit of $2,000. Thus, the maximum total yearly energy efficient home improvement credit amount may be up to $3,200
The following energy efficient home improvements are eligible for the Energy Efficient Home Improvement Credit:
Building envelope components satisfying the energy efficiency requirements:
exterior doors (30% of costs up to $250 per door, up to a total of $500);
exterior windows and skylights (30% of costs up to $600); and
insulation materials or systems and air sealing materials or systems (30% of costs).
Residential energy property (30% of costs, including labor, up to $600 for each item):
central air conditioners;
natural gas, propane, or oil water heaters;
natural gas, propane, or oil furnaces and hot water boilers; and
improvements to or replacements of panelboards, sub-panelboards, branch circuits, or feeders that are installed along with building envelope components or other energy property listed in the FAQs and enable its installation and use
Heat pumps and biomass stoves and biomass boilers (30% of costs, including labor) satisfying the energy efficiency requirements:
electric or natural gas heat pump water heaters;
electric or natural gas heat pumps; and
biomass stoves and biomass boilers
A home energy audit (Page 353-354 of Act) means an inspection and written report with respect to a dwelling unit located in the United States and owned or used by the taxpayer as the taxpayer’s principal residence which identifies the most significant and cost-effective energy efficiency improvements with respect to such dwelling unit, including an estimate of the energy and cost savings with respect to each such improvement, and is conducted and prepared by a home energy auditor that meets the certification requirements specified by the Secretary.
Basis is reduced by any credit claimed (IRC 25C(g)). The new credits apply to items placed in service after 12/31/2022 and before 1/1/2033.
The improvements qualify only for money originally spent by the taxpayer for homes in the US used as a residence (no requirement to be a primary residence!), and qualified costs include labor, site preparation and assembly.
The credits are nonrefundable and do not carry forward if unused.
Under the Energy Efficient Home Improvement Credit: a taxpayer can claim the credit only for qualifying expenditures incurred for an existing home or for an addition to or renovation of an existing home, and not for a newly constructed home.
When calculating the Energy Efficient Home Improvement Credit, a taxpayer may include the labor costs for the onsite preparation, assembly, or original installation of residential energy property such as central air conditioners; natural gas, propane, or oil water heaters; natural gas, propane, or oil furnaces or hot water boilers; electric or natural gas heat pumps; electric or natural gas heat pump water heaters; biomass stoves or biomass boilers; or improvements to panelboards, sub-panelboards, branch circuits, or feeders.
In contrast, a taxpayer may not include the labor costs for qualified energy efficient building envelope components including a qualifying insulation material or system, exterior window, skylight, or exterior door. Thus, for an energy efficient building envelope component for which a taxpayer pays a fixed price, the taxpayer must make a reasonable
allocation between the qualifying cost of the property and the nonqualifying labor cost of the installation.
Act Section 13302 (Act Page 359) (IRC Sec. 25D)
The residential energy efficient property credit has been extended through 12/31/2034 from 12/31/2023 and renamed “clean energy property credit.” It has also been retroactively increased for 2022 to 30% (Page 359, a3). Credit rates are now 26% for 2021; 30% for 2022 through the end of 2032; 26% for 2033 and 22% for 2034.
The following residential clean energy expenditures are eligible for a Residential Clean Energy Property Credit of 30%
of the cost:
solar electric property expenditures (solar panels);
solar water heating property expenditures (solar water heaters);
fuel cell property expenditures;
small wind energy property expenditures (wind turbines);
geothermal heat pump property expenditures; and
battery storage technology expenditures.
Before the passing of the Inflation Reduction Act, energy storage systems only qualified for the federal tax credit if they were paired with a solar energy system. Now, stand-alone energy storage systems can qualify for the tax credit. Batteries installed to store the electricity must be in the residence of the taxpayer and have at least 3 Kilowatt hours of storage after 12/31/2022 and qualify for the same credit.
This credit is also nonrefundable but carries forward. Biomass (woodstoves) do not qualify for this credit after 2021 because the IRA of 2022 replaced section (a)(6) which previously included biomass with the new battery rules. Expenses are considered to qualify when installation is completed or, in the case of a new home, when the taxpayer begins using the home. Additionally, basis is reduced by the credit amount.
Under the Residential Clean Energy Property Credit: a taxpayer can claim the credit for qualifying expenditures incurred for either an existing home or a newly constructed home.
When calculating the Residential Clean Energy Property Credit, a taxpayer may include the labor costs properly allocable to the onsite preparation, assembly, or original installation of the qualified property and for piping or wiring to interconnect the qualifying property to the home.
Other: Both Energy Efficiency and Clean Energy Credit:
For both credits, if a taxpayer uses property solely for business purposes, the property will not qualify for the credit.
A taxpayer who qualifies for the credits and whose use of the qualified property for business purposes is not more than 20 percent may claim the full credit. For a taxpayer who otherwise qualifies for the credits, but whose use of the qualified property for business purposes exceeds 20 percent, the taxpayer must calculate the amount of credit by including only that portion of the expenditures for the property that are properly allocable to use for nonbusiness purposes.
Used property does not qualify for either credit.