Inflation Reduction Act
The Inflation Reduction Act (IRA) is a 10-year plan that includes investments in climate protection such as tax credits for households to offset energy costs and reduce carbon emissions, and funding to support clean energy production. Read on to learn more.
IRA Details
Information included here is compiled from the bill and reports from the Congressional Research Service and other external sources. It is meant to help AHRI members to conduct their own company-specific analysis and should not be used for tax advice.
Energy Efficiency Rebate Programs
- This section appropriates $4.3 billion to remain available through September 30, 2031, to carry out a program to award grants to state energy offices to develop and implement a HOMES rebate program.
- The program shall provide rebates to homeowners and aggregators for whole-house energy saving retrofits completed before October 1, 2031.
- The total rebate amount varies depending on the type of property and the type of retrofit, with enhanced rebates for low- and moderate-income households.
- This program is based on the HOPES for Home Act. The bill also includes contractor training provisions. The rebate program is intended to “create incentives for homeowners to invest in energy efficiency improvements.”
- Funding Eligibility: Funds are to be distributed to state energy offices, which then distribute funds to individuals and aggregators to implement energy efficiency upgrades.
- Funds do not need to be used to retrofit homes occupied by low- or moderate-income households, but the rebate amount is higher for these projects. State energy offices also have the discretion to increase the rebate amount for low- or moderate-income households.
- The legislation does not define the term “whole-house energy saving retrofits.”
- The DOE mentions the Weatherization Assistance Program (WAP) as an example of a “whole house weatherization” approach that analyzes all of the building systems—the building envelope, heating and cooling systems, electrical system, and electric baseload appliances—through the completion of an energy audit.
- The DOE mentions the “Energy Saver: Whole-House Systems Approach” on its website.
- “This approach considers the house as an energy system with interdependent parts, each of which affects the performance of the entire system. It also takes the occupants, site, and local climate into consideration.”
- Funding Timeline: Funding is to remain available until expended through September 30, 2031. If all funding were expended before that date, additional funds would need to be appropriated by Congress.
- State energy programs shall submit applications for the HOMES rebate program in accordance with certain requirements, including determinations of reductions in home energy use and monitoring implementation of the program.
- This provision establishes a program to award grants to state energy offices and Indian Tribes to develop and implement a high-efficiency electric home rebate program.
- For state energy offices, $4.275 billion is to remain available through September 30, 2031.
- For Indian Tribes, $225 million is to remain available through September 30, 2031.
- This program is based on legislation formerly known as the Zero-Emission Homes Act, which seeks to encourage the purchase and installation of electric appliances and equipment in single-family homes and multifamily buildings.
- Funding Eligibility:
- For this program, the federal government will appropriate money to local governing bodies, which will then distribute funds to one of the eligible entities listed below.
- $4.275 billion is appropriated to state energy offices, which are then to award funds to eligible entities for qualified electrification projects.
- $225 million is appropriated to Indian Tribes, which are then to award funds to eligible entities for qualified electrification projects.
- “Eligible entities” that can receive funding from state energy offices and Indian Tribes include:
- A low- or moderate-income household.
- An individual or entity that owns a multifamily building not less than 50 percent of the residents of which are low- or moderate-income households.
- A governmental, commercial, or non-profit entity, as determined the Secretary of Energy, carrying out a qualified electrification project on behalf of one of the entities described above. These “qualified electrification projects” are listed below.
- Funding Timeline: Funding is to remain available until expended through September 30, 2031. If all funding were expended before that date, additional funds would need to be appropriated by Congress.
- Qualified Electrification Projects:
- The amount of the rebate for appliances shall be:
- Not more than $1,750 for a heat pump water heater.
- Not more than $8,000 for a heat pump for space heating or cooling.
- Not more than $840 for:
- An electric stove, cooktop, range, or oven.
- An electric heat pump clothes dryer.
- The amount of the rebate for non-appliance upgrades shall be:
- Not more than $4,000 for an electric load service center upgrade.
- Not more than $1,600 for insulation, air sealing, and ventilation.
- Not more than $2,500 for electric wiring.
- Qualified electrification projects must be certified under the Energy Star program established by Section 324A of the Energy Policy and Conservation Act (42 U.S.C. 6294a), if applicable.
- The amount of the rebate for appliances shall be:
- State energy offices and Indian Tribes are to submit grant applications for funding, outlining:
- Plans to verify income eligibility of eligible entities seeking a rebate.
- A plan to allow rebates for qualified electrification projects at the point of sale in a manner that ensures that the income eligibility of an eligible entity seeking a rebate may be verified at the point of sale.
- A plan to ensure that an eligible entity does not receive a rebate for the same qualified electrification project through both a high-efficiency electric home rebate program and any other federal grant or rebate program.
- The maximum rebate for an eligible entity is $14,000.
- 100% rebates are available for individuals with an annual income less than 80% of the median income. Otherwise, rebates may only cover 50% of the cost of a qualified electrification project.
- This provision provides $200 million to remain expended through September 30, 2031, to provide financial assistance to states to develop and implement programs to provide training and education to contractors involved in the installation of home energy efficiency and electrification improvements.
- Funding Eligibility: For this program, the federal government will provide funding to states, which will then use that funding to implement the relevant training programs.
- Funding Timeline: Funding is to remain available until expended through September 30, 2031. If all funding were expended before that date, additional funds would need to be appropriated by Congress.
Tax Credits
- The credit is renamed as the “Sec. 25C Energy efficient home improvement credit”
- The termination date of the credit is moved to December 31, 2032, meaning property placed in service before that date can qualify for the credit.
- The extension of the 25C credit “shall apply to property placed in service after December 31, 2021” and before December 31, 2032.
- Beyond the date change, further amendments to Section 25C “shall apply to property placed in service after December 31, 2022” and before December 31, 2032.
- For selected property placed in service after December 31, 2024, taxpayers must include a “qualified product identification number” to claim the credit.
- Products must be produced by “qualified manufacturers” that:
- Assign unique product identification numbers to each item
- Comply with labeling standards published by the Secretary
- Make periodic written reports to the Secretary
- Products must be produced by “qualified manufacturers” that:
- The provision extends and ultimately expands the credit:
- For property placed in service after December 31, 2021, and before December 31, 2022, the previous credit rate of 10 percent pertains, with a lifetime cap of $500 ($200 for windows).
- Individual product caps:
- $50 for any advanced main air circulating fan;
- $150 for any qualified natural gas, propane, or oil furnace or hot water boiler; and
- $300 for any item of energy-efficient building property (e.g. heat pumps, AC, water heaters).
- Individual product caps:
- For property placed in service after December 31, 2022, the credit rate increases to 30 percent, with a $1,200 annual limitation in lieu of the previous $500 lifetime cap.
- For property placed in service after December 31, 2021, and before December 31, 2022, the previous credit rate of 10 percent pertains, with a lifetime cap of $500 ($200 for windows).
- Individual product caps:
- $600 for any item of qualified energy property;
- $600 in aggregate for all exterior windows and skylights;
- $250 for any exterior door ($500 in aggregate); and
- $2,000 in aggregate for all heat pumps, heat pump water heaters, biomass stoves, and boilers.
- The provision updates various standards and associated limitations related to energy efficiency upgrades. It also removes eligibility of roofs, advanced main air circulating fans, and certain windows.
- The provision expands the credit to cover the costs of home energy audits, up to a maximum credit of $150.
- “Qualified Energy Property” includes, but is not limited to:
- Any of the following which meet or exceed the highest efficiency tier (not including any advanced tier) established by the Consortium for Energy Efficiency which is in effect at the beginning of the calendar year in which property is placed in service:
- An electric or natural gas heat pump water heater
- An electric of natural gas heat pump
- A central air conditioner
- A natural gas, propane, or oil water heater
- A natural gas propane, or oil furnace or hot water boiler
- A biomass stove or boiler which:
- Uses the burning of biomass fuel to heat a dwelling unit located in the United States and used as a residence by the taxpayer, or to heat water for use in such a dwelling unit, and
- Eligible fuels include biodiesel and renewable diesel and second-generation biofuels.
- Has a thermal efficiency rating of at least 75 percent (measured by the higher heating value of the fuel).
- Uses the burning of biomass fuel to heat a dwelling unit located in the United States and used as a residence by the taxpayer, or to heat water for use in such a dwelling unit, and
- Any oil furnace or hot water boiler which:
- Is placed in service after December 31, 2022, and before January 1, 2027, and:
- 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 is 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 fuel blends at least 50 percent of the volume of which consists of an eligible fuel.
- Eligible fuels include biodiesel and renewable diesel and second-generation biofuels.
- Is placed in service after December 31, 2022, and before January 1, 2027, and:
- Any of the following which meet or exceed the highest efficiency tier (not including any advanced tier) established by the Consortium for Energy Efficiency which is in effect at the beginning of the calendar year in which property is placed in service:
- The credit is renamed as the “Sec. 25D Residential Clean Energy Credit.”
- The provision extends the credit to apply to property placed in service before January 1, 2035.
- It allows the following expenses to qualify: qualified residential clean energy property expenditures, including solar electric, solar water heating, fuel cell, and small wind energy, and geothermal heat pumps.
- The provision extends the full 30 percent credit for property placed in service before January 1, 2033,
- The credit phases down to 26% for projects placed in service after December 31, 2032, and before January 1, 2034.
- The credit phases down to 22% for projects placed in service after December 31, 2033 and before January 1, 2035.
- The provision also expands the definition of eligible property to include battery storage technology.
- The provision extends the Section 45L new energy efficient home credit to apply to homes acquired after December 31, 2021, and before January 1, 2033. The provision also increases the credit amount.
- Single-family and Manufactured Homes:
- In the case of dwelling units eligible to participate in the Energy Star Residential New Construction Program or Manufactured Homes Program, the provision provides a $2,500 credit.
- An enhanced credit of $5,000 is available to homes that are certified as zero-energy ready under the zero-energy ready home program of the Department of Energy as in effect on January 1, 2023 (or any successor program determined by the Secretary).
- Single-family homes must meet one of the following requirements
under (A) or (B):- (A)
- (i)
- (I) In the case of a dwelling unit acquired before January 1, 2025, the Energy Star Single-Family New Homes National Program Requirements 3.1, or
- (II) In the case of a dwelling unit acquired after December 31, 2024, the Energy Star Single-Family New Homes National Program Requirements 3.2, and
- (ii) The most recent Energy Star Single-Family New Homes Program Requirements applicable to the location of such dwelling unit (in effect January 1, 2023, or January 1 of two calendar years prior to the date the dwelling unit was acquired, whichever is later).
- (i)
- (B) Such dwelling meets the most recent Energy Star Manufactured Home National Program requirements in effect January 1, 2023, or January 1 of two calendar years prior to the date such dwelling unit is acquired, whichever is later.
- (A)
- In the case of dwelling units eligible to participate in the Energy Star Residential New Construction Program or Manufactured Homes Program, the provision provides a $2,500 credit.
- Multifamily Homes
- In the case of a dwelling unit eligible to participate in the Energy Star Multifamily New Construction Program, the provision provides a credit of $500.
- If projects satisfy prevailing wage requirements, they can claim a credit of $2,500.
- In the case of a dwelling unit certified as zero-energy ready under the zero-energy ready home program of the Department of Energy in effect on January 1, 2023 (or any successor program determined by the Secretary), an enhanced credit of $1,000 is available.
- If projects satisfy prevailing wage requirements, they can claim a credit of $5,000.
- Multifamily homes must meet the following requirements:
- Such dwelling unit meets the most recent Energy Star Multifamily New Construction National Program requirements (in effect on either January 1, 2023, or January 1 of three calendar years prior to the date the dwelling was acquired, whichever is later), and
- Such dwelling unit meets the most recent Energy Star Multifamily New Construction Regional Program requirements applicable to the location of such dwelling unit (in effect on either January 1, 2023, or January 1 of three calendar years prior to the date the dwelling was acquired, whichever is later).
- In the case of a dwelling unit eligible to participate in the Energy Star Multifamily New Construction Program, the provision provides a credit of $500.
- The provision revives the Section 48C qualified advanced energy property credit, allowing the Secretary to allocate an additional $10 billion in tax credits to qualifying projects, starting in 2023.
- $4 billion is set aside for qualifying projects in census tracts in which a coal mine or coal power plant has closed and in which no project received a 48C credit allocation in prior years.
- Projects receive a base credit rate of 6 percent of qualified investments in qualified advanced energy projects.
- To receive a bonus rate of 30 percent, taxpayers must satisfy the prevailing wage requirements and satisfy the apprenticeship requirements during the construction of the project.
- Similar requirements to the original credit apply, though eligibility is modified to include projects to establish, expand, or re-equip facilities for the production, manufacturing, or recycling or advanced grid, energy storage, and fuel cell equipment; equipment for the production of low-carbon fuels, chemicals, and related products; renewable energy and energy efficiency equipment; equipment for the capture, removal, use, or storage of carbon dioxide; and advanced light-, medium-, and heavy-duty vehicles and related components and infrastructure.
- The credit is also allowed for projects to reduce carbon emissions at existing industrial facilities by at least 20 percent.
- The Secretary will determine allocations to projects each year with a requirement that property is placed in service within 4 years of the date of the allocation.
- The provision extends the section 48 energy investment tax credit (ITC), which allows taxpayers to claim a tax credit for the cost of energy property.
- Thermal Storage: For thermal energy storage property, the provision provides a base credit rate of 6 percent and a bonus credit rate of up to 30 percent of the basis of energy property.
- Projects qualify for the bonus rate if they meet prevailing wage and apprenticeship requirements.
- The credit is available for thermal energy storage projects that are placed in service after December 31, 2022, and that begin construction before January 1, 2025.
- Geothermal Heat Pumps: For “equipment which uses the ground or ground water as a thermal energy source to heat a structure or as a thermal energy sink to cool a structure,” the credit phases out over time, with an initial base credit of 6 percent and a bonus credit rate of 30 percent of the basis of energy property.
- Projects qualify for the bonus rate if they meet prevailing wage and apprenticeship requirements.
- The base credit rate is 6 percent for property that begins construction before January 1, 2033, and which is placed in service after December 31, 2021.
- The base credit rate phases down to 5.2 percent for property that begins construction after December 31, 2032, and before January 1, 2034.
- The base credit rate phases down to 4.4 percent for property that begins construction after December 31, 2033, and before January 1, 2035.
- Domestic Content: Taxpayers may claim an increased credit with respect to energy property placed into service after December 31, 2022, if such property meets the domestic content requirements described in this subtitle. The increase is 2 percentage points (or 10 percentage points if the taxpayer meets the prevailing wage and apprenticeship requirements).
- Energy Communities: For any energy property that is placed in service within an energy community, the credit percentage is increased by 2 percentage points (or 10 percentage points if the taxpayer meets the prevailing wage and apprenticeship requirements).
- The provision applies to property placed in service after December 31, 2022.
- The provision updates and expands the energy efficient commercial buildings deduction by increasing the maximum deduction, determined on a sliding scale.
- The maximum value of the base deduction is $0.50 per square foot, increased by $0.02 per square foot for every percentage point by which the designed energy cost savings exceed 25 percent against the reference standard, not to exceed $1.00 per square foot.
- The value of the bonus deduction is $2.50 per square foot, increased by $0.10 per square foot for every percentage point by which designed energy cost savings exceed 25 percent against the reference standard, not to exceed $5.00 per square foot. To receive the bonus, projects must fulfill prevailing wage and apprenticeship requirements.
- The provision only allows deductions for a building for 3 years.
- For property to qualify it must meet one of the following requirements:
- Installation of such property begins prior to the date that is 60 days after the Secretary publishes guidance relating to prevailing wage and apprenticeship requirements.
- Installation of such property satisfies prevailing wage and apprenticeship requirements.
- The provision updates the eligibility requirements for energy efficiency standards:
- Property must reduce associated energy costs by 25 percent or more in comparison to a building that meets the more recent of either:
- Standards 90.1-2007 published by the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America, or
- The most recent standards published by the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America
- Property must reduce associated energy costs by 25 percent or more in comparison to a building that meets the more recent of either:
- The provision eliminates the availability of a partial allowance of credits.
- This provision allows taxpayers to elect to take an alternative, parallel deduction for energy efficient lighting, HVAC, and building envelope costs placed into service in connection with a qualified retrofit plan.
- The value of the base deduction is determined by the reduction in a building’s energy usage intensity (EUI) upon completion of the retrofit, equal to $0.50 per square foot, increased by $0.02 per square foot for every percentage point by which the reduction in EUI exceed 25 percent, not to exceed $1.00 per square foot.
- The value of the bonus deduction is $2.50 per square foot, increased by $0.10 per square foot for every percentage point by the reduction in EUI exceeding 25 percent against the reference standard, not to exceed $5.00 per square foot.
- In order to claim the bonus deduction amount, taxpayers must satisfy prevailing wage and apprenticeship requirements for the duration of the construction of the project.
To qualify for the alternative deduction, a building retrofit project must reduce a building’s EUI by no less than 25 percent.
Funding for the Defense Production Act
- This provision appropriates $500 million to remain available until September 30, 2024, to carry out the Defense Production Act.
- It is unclear how this funding will be distributed, but it is expected that the funds will be divided evenly between critical minerals and heat pumps.
Guidance Documents
FAQs on Home Energy Rebate Programs (DOE)
FAQs on Energy Credits for Residences (including 25C) (Treasury/IRS)
Inflation Reduction Act Guidebook (Treasury/IRS)
Summary of IRA Guidebook (Treasury/IRS)
Updated Reference Standard 90.1 for 179D (Treasury/IRS)
Resources
Rewiring America Savings Calculator
White House Clean Energy for All
DOE Guidance for Home Energy Rebate Programs
DOE Guidance on the Qualifying Advanced Energy Project Credit Program
DOE DPA Roundtables and RFI Executive Summary
Energy Efficient Home Improvement Credit (25C) One Pager
Residential Clean Energy Credit (25D) One Pager
Treasury Guidance on the Low-Income Communities Bonus Credit Program
Treasury Guidance on Energy Community Bonus Credit Amounts
Treasury Guidance for Domestic Content Bonus Credits - Sections 45, 45Y, 48, and 48E
Treasury Guidance on the Energy Efficient Home Improvement Credit (25C)
Find a Contractor with NATE-Certified Technicians
2023 AHR Expo Presentation: A Closer Look at Inflation Reduction Act Incentives