The Inflation Reduction Act (the IRA) added and expanded tax credits for various types of energy efficiency products as well as for individuals installing solar on their homes.  Some of the tax credits are only available to individuals, while others are only available to commercial investors.  This blog post explains the expanded tax credits for individuals installing solar and energy efficiency products, and the energy efficiency equipment that in commercial investors’ hands now qualifies for tax credits.  

Residential Solar Tax Credit for Homeowners

Section 25D provides a tax credit to homeowners who install solar on their own home, whether it is their principal residence or a vacation home.[1] The IRA increases the amount of tax credits from 26 percent of the cost to install a system to 30 percent, if such system is placed in service between December 31, 2021 and January 1, 2033.[2]  The credit decreases by four percent each year beginning in 2033, with a total phase out of any system placed in service after January 1, 2035. An important note is that the tax credit is available to the individual taxpayer in the taxable year in which the installation of the solar property is complete.[3]

Battery Storage for Individuals

Section 25D has been updated to provide a 30 percent tax credit for qualified battery storage technology expenditures by individual taxpayers for property placed in service between December 31, 2021 and January 1, 2033.[4] To qualify, the battery storage must be installed in connection with a dwelling unit located in the United States, which must be used as a residence by the taxpayer (that is a second home qualifies as there is not a “principal” requirement), and have a capacity of at least three kW hours.[5] There is no limitation in the IRA to the type of energy used to charge the battery. Credits allowed under section 25D are extended to all property placed in service before December 31, 2034.[6]

Qualifying Energy Efficiency Improvements for Individuals

From December 31, 2022 to December 31, 2032, individuals can obtain tax credits in the amount of 30 percent of the sum (1) paid or incurred for “qualified energy efficiency improvements”[7] installed during such taxable year and (2) the amount of “residential energy property expenditures”[8] paid or incurred by the taxpayer for such taxable year.[9] The distinction between qualified energy efficiency improvements and residential energy property expenditures is that qualified energy efficiency improvements refers to the acquisition of the specified energy property[10] itself, whereas residential energy property expenditures are costs associated with the installation of energy property.

Section 25C previously had a lifetime cap of $500 per taxpayer. The amendments made in the IRA now allow a taxpayer to claim up to $1,200 per year in credits associated with this section. The IRA lists certain other limitations, such as, for improvements to windows, a taxpayer may claim up to a total of $600 per year and $500 per year in the aggregate for all updates to exterior doors.[11]  Heat pumps, heat pump water heaters and biomass stoves and boilers are separately capped at $2,000 per taxpayer, per taxable year. [12]

Individuals should look closely at potential equipment as the IRA has outlined specific requirements that all equipment must meet to be eligible for credits. For example, for windows to qualify for the tax credits in this section, they must be rated Energy Star’s most efficient certification, and doors must meet applicable Energy Star requirements. All other equipment must generally meet the prescriptive criteria outlined in the International Energy Conservation Code standard.

Finally, energy efficiency improvements eligible for the generous 30 percent tax credits must both be produced by a qualified manufacturer[13] and the product identification number must be included on the taxpayer’s tax return for the taxable year.[14]

Other Tax Credit Eligible Energy Efficiency Equipment for Commercial Investors

For commercial investors, the IRA expanded section 48 to include certain energy efficiency equipment.  The added items are microgrid controllers[15] and electrochromic glass which uses electricity to change its light transmittance properties in order to heat or cool a structure (only with respect to property the construction of which begins before January 1, 2025).[16]

[1] I.R.C. § 25D(a)(1).

[2] I.R.C. § 25D(g)(3)-(5).

[3] I.R.C. § 25D(e)(8)(A).

[4] I.R.C. § 25D(g)(3).

[5] I.R.C. § 25D(a)(6)(A)-(B).

[6] I.R.C. § 25D(h).

[7] Qualified energy efficiency improvements are energy efficient building envelope components installed in or on a dwelling unit located in the United States and owned and used by the taxpayer as the taxpayer’s principal residence, the original use of such component commences with the taxpayer, and such component reasonably can be expected to remain in use for at least 5 years. Energy efficient building envelope components are building envelop components which meet (A) in the case of exterior windows, Energy Star most efficient certification requirements, (B) in the case of an exterior door, applicable Energy Star requirements, and (C) in the case of any other component, the prescriptive criteria for such component established by the most recent International Energy Conservation Code standard in effect as of the beginning of the calendar year which is  two years prior to the calendar year in which such component is placed in service. I.R.C. § 25C(c)(2).

[8] Residential energy property expenditures mean expenditures made by the taxpayer to install qualified energy property which is installed on the taxpayer’s principal residence in the United States, and was originally placed in service by the taxpayer. The term includes expenditures for labor costs associated with the onsite preparation, assembly, or original installation of the property. I.R.C. § 25C(d)(1).  The reference to “principal residence” means that installation on a second home does not qualify.

[9] I.R.C. § 25C(g)(2).

[10] Energy property pursuant to section 25C means any of the following: (A) (i) electric or natural gas heat pump water heaters, (ii) electric or natural gas heat pumps, (iii) central air conditioners, natural gas, propane or oil water heaters, or (iv) natural gas, propane, or oil furnaces or hot water boilers which meet or exceed the highest efficiency tier established by the Consortium for Energy Efficiency which is in effect as of the beginning of the calendar year in which the property is placed in service; (B) biomass stove or boilers that have a thermal efficiency rating of at least 75 percent that uses the burn biomass fuel to heat a dwelling or heat water for use in such dwelling; (C) any oil furnace or hot water boiler which is placed in service between December 31, 2022 and January 1, 2027 and which meets or exceeds 2021 Energy Star efficiency criteria and is rated by the manufacturer for use with fuel blends at least 20 percent of the volume of which consists of an eligible fuel, or is placed in service after December 31, 2026 and achieves an annual fuel utilization efficiency rate of not less than 90, and is rated by the manufacturer for use with eligible fuel blends of 50 percent or more; and (D) any improvements to, or replacement of, a panelboard, sub-panelboard, branch circuits, or feeders which are installed consistent with the National Electric Code, have load capacity of not less than 200 amps, is installed in conjunction with any qualified energy efficiency improvements.  I.R.C. § 25C(d)(2)(A).

[11] I.R.C. § 25C(a)(1)-(2).

[12] I.R.C. § 25C(b)(1).

[13] “Qualified manufacturer” is defined as any manufacturer of specified property which enters into an agreement with the IRS and agrees to (a) assign a product identification number to each item of specified property produced by such manufacturer utilizing a methodology that will ensure that such number (including any alphanumeric) is unique to each such item (by utilizing numbers or letters which are unique to such manufacturer or by such other method as the IRS may provide), (b) label such item with such number in such manner as the IRS may provide, and (c) make periodic written reports to the IRS (at such times and in such manner as the IRS may provide) of the product identification numbers so assigned and including such information as the IRS may require with respect to the item of specified property to which such number was so assigned. I.R.C. § 25C(h)(3).

[14] I.R.C. § 25C(h)(2).

[15] Qualified microgrids are electrical systems which (i) include equipment capable of generating between 4 kW and 20 MW of electricity, (ii) is capable of operating in connection with the electrical grid and as a single controllable entity with respect to such grid, and independently (and disconnected) from such grid, and (iii) is not part of a bulk-power system (as defined in Section 215 of the Federal Power Act (16 U.S.C. 824o)). I.R.C. § 48(a)(8)(A).

[16] I.R.C. § 48(a)(3)(A)(ii).