The Tax Credit Everyone Should Be Talking About

Why are energy efficiency practitioners waiting with bated breath for HOMES/HEAR rebates when they can immediately use the $3,200* yearly 25C tax credit to help drive business? While valuable, the reality is that this $9 billion in homeowner rebates for income-eligible folks may not be in every state, and most states won’t roll out a program until late 2024 or beyond. The 25C has been around for quite a few years, and millions of taxpayers have claimed this credit since 2006. It has proved to be a successful tool in a contractor’s arsenal to garner more leads and close more deals.

What Is The 25C Tax Credit?

The 25C tax credit is a credit on your taxes—not just a deduction—for up to 30% of eligible measures not to exceed certain limits per measure. The total 25C credit that anyone can claim each year is limited to $3,200 with a mixture of various measures like insulation, heat pumps, or eligible solar and electrical. This is a dramatic increase from the previous lifetime limit of $500 and was signed into law under the Inflation Reduction Act (IRA) alongside many of the other great investments into energy efficiency and renewable energy.

This is for residential homes only, including tenants, but not for offsite landlords or commercial buildings. New home construction is also not included, but certifications like Energy Star and Zero Energy Ready homes may be covered under a different tax credit called the 45L for up to $5,000.

Why Aren’t Contractors Using It Today?

It appears that simple confusion on the ground could be an impediment to the uptake of this expanded tax benefit for consumers. Business owners are fearful to take risks associated with including something in their sale that can come back to bite them down the road (i.e., a consumer unable to take the deduction due to unforeseen circumstances in eligibility, not having the right back up documentation, etc.). Many contractors have said they don’t feel comfortable educating their customers on the 25C simply because they don’t understand it or have heard the required documentation may be onerous or impossible to comply with.

Let’s break down some of these requirements so that we can figure out the commonly perceived barriers that may have prevented contractors from informing their clients of what is available.

• Only materials costs qualify for insulation and air sealing, and not “onsite preparation, assembly, or original installation.” This does not appear include the admin costs associated with the project, overhead costs, insurance costs, truck costs, or any of the other things it takes to run a business.
  • Line 18a is where an accountant would list materials cost, line 18b is 30% of that number not to exceed $1,200. So, if your air sealing and insulation job was $4,200 on a contractor invoice it may be assumed that $3,000 is materials and $1,200 on 18b could be the labor. This is spelled out on the form provided by the accountant with no additional requirements for contractor documentation.
  • Right, wrong, or indifferent there could be an argument to be made about selling bags of insulation on an invoice (as required by law in some states) and providing the installation free of charge. Some insulation firms even pay their installers on the amount of material installed, or by the overall profitability of a job. This is obviously a grey area, and one to think about when navigating the opportunity to disclose something that the homeowner or accountant can just as easily look up.
• Work performed requires manufacturer certification that “a building envelope component is an eligible building envelope component.”
  • If an item is not classified as load bearing, or a finished product, and it directly impacts the energy loss/gain of a building, it should be considered an eligible product. Air sealing and insulation materials can easily be explained as envelope energy components.
  • The instructions clearly state that you don’t need to attach the documentation to your return, just to keep it in your file. Saving a copy of the window sticker, promotional materials, or other documentation will suffice.
• Work performed within a program with rebates and financing may not be eligible for the tax credit.
  • Any projects that utilize subsidized financing and where rebates are not treated as income for the customer must reduce the project cost by that amount. This includes any federal, state, or local programs designed to conserve or produce energy.
  • If you received a subsidy from a public utility for the purchase or installation of an energy conservation product and that subsidy wasn’t included in your gross income, you must reduce your cost for the product by the amount of that subsidy before you figure your credit. This rule also applies if a third party (such as a contractor) receives the subsidy on your behalf.
• Insulation and air sealing materials or systems that meet International Energy Conservation Code (IECC) standards in effect at the start of the year 2 years before installation.
  • This one gets tricky because you will need to know what energy code cycle year your state was following two years prior and ensure that the work exceeds those levels for a credit. For the most part, most quality contractors like to meet or exceed minimums without having the customers incur costs above what is necessary. The 2009 IECC calls for minimum insulation levels that have remained consistent throughout the years and have never fallen below since. In many cases, they have increased (as in 2015), but subsequently lowered in 2021.

A Focus on Solutions

With all of these objections aside, let’s focus on some solutions to make it easier for contractors to rest well at night knowing they have not deprived their customers from getting what is rightfully theirs, at the same time limiting liability from something outside of their control. The best way any businessperson can protect themselves in transactions like these is through a disclaimer. A small asterisk next to the number that says “*Please consult with your tax professional to ensure you qualify for this credit.” Of course, there are more reasons than those listed above for why a customer may not get this credit. The greatest of which is if they don’t have a tax appetite (the ability to fully use the entire tax credit in one year) or pay enough taxes to qualify. Many self-employed borrowers, and those just making ends meet are not leaving an extra $2,000 on the table each year.

One of the greatest opportunities, and threats, of the 25C is the $150 energy audit credit. This could certainly be used at the top and bottom of the sales funnel to create more leads and close more sales. What customer doesn’t want a $150 off something they may or may not already know they need? To qualify for this audit a few things need to happen, be documented, and accounted for in the process.

In order to be considered a qualified energy audit, it needs to:

1. Identify the most significant and cost-effective energy efficiency improvements for the home, including an estimate of the energy and cost savings for each improvement. This will most likely require some time of utility bill calibration and energy modeling to determine the savings. It is, however, an estimate and the auditor, at their discretion, gets to decide what that estimate may be.
2. Be conducted and prepared by a certified home energy auditor. The IRS provides a list of acceptable certifications of qualified Energy Auditors, this includes RESNET HERS Raters, BPI certified Building Analyst Professionals, and a few others.

One concern here could be that this incentive may impact the audit price up and down artificially. In some parts of the country, energy audits are offered for free to solicit leads for other energy efficiency services. In other places, audits can cost thousands of dollars depending on location, scarcity, or report type. There is a chance here that some professionals may use this audit as bait to go in and sell items outside of the priority list for their customers. It will be easy to offer a $600 credit on windows, plus $150 credit for the “energy audit” completed on the home.

It’s important to note that there are no further explanations as to what that audit should include. There is no verbiage in 25C about diagnostic testing or health and safety outside of mention of a “vapor retarder” as an eligible measure.

The Bottom Line

With the pending HOMES and Electrification rebates coming down to states through the Inflation Reduction Act (IRA), the 25C tax credit has taken a back seat and nobody is even talking about it. How this relatively small amount can stand up to almost $14k in rebates for a homeowner is hard to fathom. What we can say is that the 25C, based off past data, could wind up being way more than the $4.5 billion in HOMES rebates.

The tax credit is also available for everyone, no matter what their income is. It includes solar, and solar thermal, as well as other measures that really lend towards the “whole home approach.” As we prepare homes for electrification, we know that there will be a need to upgrade basic wiring and electrical boxes to handle the load of car chargers and induction stoves. This tax credit can help offset some of those costs, and really be one more item on the estimate that helps drive the project cost down, and increase the opportunity to get the deal closed.

*The credit limit for each property is as follows:

• $1,200 for insulation or air sealing material system.
• $250 for one exterior door and $500 for all exterior doors.
• $600 for windows.
• $600 for central air conditioners.
• $600 for natural gas, propane, or oil water heaters.
• $600 for natural gas, propane, or oil furnace or hot water boilers.
• $600 for improvements or replacements of panelboards, subpanel boards, branch circuits, or feeders.
• $150 for home energy audits.
• $2,000 for heat pumps and heat pump water heaters; biomass stoves and biomass boilers.

For more information, visit www.irs.gov/pub/irs-pdf/i5695.pdf.