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Clean energy credits for individual taxpayers

2023 year-end tax letter

Individuals looking to make energy efficient home improvements should consider reviewing some of the taxpayer-friendly benefits offered in last year’s Inflation Reduction Act of 2022 (IRA). Below is a summary of select items to consider when evaluating home improvement needs as well as gathering data while preparing 2023 tax returns.

This article will examine two credits available for improvements made to taxpayer residences. These provisions do not apply to residences held for use in a trade or business. Instead, these credits can be claimed regarding homes used as a residence (sometimes only a principal residence) of the taxpayer. Since this discussion does not detail all of the IRA benefits available to individuals (and does not cover provisions applicable to businesses), we encourage you to visit our IRA resource center for more information.

Energy Efficient Home Improvement Credit

The Energy Efficient Home Improvement Credit (EEHIC) applies to the qualifying expenditures made by an individual during the tax year for the following:

  1. Installment of qualified energy efficiency improvements,
  2. Residential energy property, and
  3. Home energy audits.
  Qualified energy efficiency improvements  Residential energy property  Home energy audits 
Qualifying property  Exterior doors; exterior windows; skylights; insulation materials or systems; air sealing materials or systems  Central air conditioners; natural gas, propane, or oil water heaters; natural gas, propane, or oil furnaces; hot water boilers; improvements to or replacements of panelboards, subpanelboards, branch circuits; electric or natural gas heat pump water heaters, electric or natural gas heat pumps; biomass stoves and boilers  Determine home energy usage and energy inefficiencies; identify the most significant and cost-effective energy efficient improvements, including an estimate of energy and cost savings for each improvement. Must be performed by a qualified home energy auditor in order to be eligible for the credit. 

The EEHIC equals 30% of qualifying expenditures with additional limitations based on the type of expenditure. The credit for exterior doors is limited to $250 per door, up to a total of $500 per year. The credit for exterior windows and skylights is limited to $600 per year. Home energy audits are limited to an annual amount of $150. Excluding certain expenditures, the overall limit on the EEHIC per year is $1,200. Electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves and biomass boilers have an annual credit limit of $2,000. This $2,000 annual limit is applied separately from the other limitations.

There are certain energy efficiency standards that some property must satisfy in order to be eligible for the credit. For example, exterior doors must meet applicable Energy Star requirements, windows and skylights must meet the Energy Star most efficient certification requirements. Additional efficiency standards apply to other types of property.

The EEHIC is not available for improvements made to a home that is not used as a residence. The credit can only be claimed on qualified energy improvements made, and home energy audits conducted, with respect to the taxpayer’s principal residence.

The EEHIC is only available 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. The home must be located in the United States.

The EEHIC may not be carried forward and is nonrefundable. Thus, if a taxpayer does not have sufficient tax liability to claim all or a portion of the credit in the year in which the related property is placed in service, the unused amount of the credit is permanently lost.

Residential Clean Energy Property Credit

The Residential Clean Energy Property Credit (RCEPC) applies to the following types of property:

  1. Solar electric property expenditures (solar panels);
  2. Solar water heating property expenditures (solar water heaters);
  3. Fuel cell property expenditures;
  4. Small wind energy property expenditures (wind turbines);
  5. Geothermal heat pump property expenditures; and
  6. Battery storage technology expenditures.

Generally, there is no overall limit on the amount of credit available for RCEPC and the credit equals 30% of qualified expenditures. However, there are some limitations on the amount of credit available for fuel cell property based on the capacity of the qualified fuel cell property.

Some of the RCEPC property must meet efficiency standards. Solar water heating property must be certified for performance by the nonprofit Solar Rating Certification Corporation or a comparable entity endorsed by the state in which the property is installed. Geothermal heat pump property must meet the requirements of the Energy Star program which are in effect at the time that the expenditures are made. Battery storage technology property must have a capacity of 3 kilowatt-hours or greater.

All RCEPC property expenditures, other than fuel cell property expenditures, must be made with regards to a home located in the United States and used as a residence by the taxpayer. Fuel cell property expenditures must be made with regards to a home located in the United States and used as a principal residence by the taxpayer. The RCEPC may be claimed with regards to qualifying expenditures incurred for either an existing home or a newly constructed home.

Any unused RCEPC may be carried forward and used to reduce tax liability in future tax years. The RCEPC is nonrefundable so any unused credit amount must be carried forward.

Rules for Energy Efficient Home Improvement Credit and Residential Clean Energy Property Credit

There is no longer a lifetime limit for either the EEHIC or RCEPC. Any limitations are determined on an annual basis. Both the EEHIC and the RCEPC are claimed in the year that the applicable property is installed. Used property purchased by a taxpayer is not eligible for either the EEHIC or the RCEPC. Only new qualifying property purchased and installed by a taxpayer is eligible for either credit.

Data collection

The Internal Revenue Service (IRS) has not yet updated the form that will be used to claim the EEHIC or RCEPC. On the other hand, guidance has been issued on the substantiation requirement for the home energy audit credit. A taxpayer will satisfy this substantiation requirement if they (1) retain the written report signed by the qualified home energy auditor, and (2) comply with the instructions for Form 5695, Residential Energy Credits.

In order to support the home energy audit credit, a report from a qualified home energy auditor must contain:

  1. The qualified home energy auditor’s name and the relevant employer identification number (EIN) or other type of relevant taxpayer identifying number,
  2. An attestation that the qualified home energy auditor is certified by a qualified certification program, and
  3. The name of such qualified certification program.

Knowing this can also provide some help on what documentation will be required to support either the EEHIC or RCEPC. Most of the requisite information can be obtained directly from the seller or manufacturer of the qualifying property. For example, receipts showing the cost of the energy-efficient improvements or property must be preserved. While sometimes labor is an eligible cost, it is not always the case. So, depending on the credit, the cost of labor may need to be separately stated so that it can be excluded from the credit calculation when necessary. If the property must satisfy certain energy efficiency standards to qualify for a credit, proof the property satisfies such requirements should be maintained (such as appliance labels and instruction manuals). The IRS instructions for Form 5695 state that for purposes of taking the credit, taxpayers can rely on the manufacturer’s written certification that a product is qualifying property for the credit. Do not attach the certification to your return but instead, retain it as part of the tax return documentation.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Chad Resner
Firm Director
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