Inflation Reduction Act

• 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
• 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).
  • 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.

• 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).
  • 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.

• 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).
    • (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.
• 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).

• 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                   
• 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.