IRS Provides Guidance on Requirements for Claiming Home Energy Audit Credit

(Parker Tax Publishing August 2023)

The IRS announced that it intends to propose regulations addressing the requirements for home energy audits with respect to the energy efficient home improvement credit under Code Sec. 25C, as amended by the Inflation Reduction Act of 2022 (Pub L. 117-169). The IRS provided the requirements that the forthcoming proposed regulations will set forth for qualifying as a home energy auditor for purposes of the Code Sec. 25C credit, as well as a substantiation rule and a transition rule for 2023 allowing taxpayers to claim the credit for a home energy audit even if the auditor does not meet the definition of a qualified home energy auditor. Notice 2023-59.

Background

Code Sec. 25C was enacted in 2005 to provide a tax credit for the purchase and installation of certain energy efficient improvements in taxpayers' principal residences. Congress has amended Code Sec. 25C several times, most recently under Section 13301 of the Inflation Reduction Act of 2022 (IRA) (Pub. L. 117-169), which renamed this provision the "energy efficient home improvement credit" and provided that Code Sec. 25C, as amended by the IRA, applies to property placed in service prior to January 1, 2033.

As amended by the IRA, Code Sec. 25C(a) allows a credit amount equal to 30 percent of the sum of the amounts that individual taxpayers pay or incur during a tax year for (1) qualified energy efficiency improvements installed during the year, (2) residential energy property expenditures, and (3) home energy audits.

The Code Sec. 25C credit is generally limited to an annual cap of $1,200. Within this $1,200 limitation, Code Sec. 25C(b) sets forth further annual caps for certain categories of improvements. The caps and categories of improvements under these limitations are as follows: $600 for any item of qualified energy property, as defined in Code Sec. 25C(d)(2); $600 for exterior windows and skylights; $250 for any single exterior door and $500 in the aggregate for all exterior doors; and $150 for home energy audits.

Credit for Home Energy Audit Expenditures

Under Code Sec. 25C(e), the term "home energy audit" means an inspection and written report with respect to a dwelling unit located in the United States and owned or used by the taxpayer as the taxpayer's principal residence (within the meaning of Code Sec. 121). The audit must (1) identify the most significant and cost-effective energy efficiency improvements with respect to such dwelling unit, including an estimate of the energy and cost savings with respect to each such improvement, and (2) be conducted and prepared by a home energy auditor that meets the certification or other requirements specified in regulations or other guidance.

As noted above, Code Sec. 25C(b)(6)(A) limits the credit allowed for amounts paid or incurred by the taxpayer during the tax year for home energy audits up to $150. Under this limit, for example, a taxpayer that pays $1000 for a home energy audit during the tax year may only claim a $150 credit for such tax year for this expenditure, and not the full 30 percent of the amount of the expenditure, even if the taxpayer does not have any other expenditures eligible for the Code Sec. 25C credit during the tax year. In addition, Code Sec. 25C(b)(6)(B) imposes a substantiation requirement, requiring taxpayers claiming the credit to include with their tax returns "such information or documentation as the Secretary may require."

Notice 2023-59

On August 4, the IRS issued Notice 2023-59, announcing that it intends to issued proposed regulations addressing the requirements for home energy audits with respect to the energy efficient home improvement credit under Code Sec. 25C. Sections 2 and 3 of Notice 2023-59 provide relevant background and definitions. Section 4 specifies the requirements that the forthcoming proposed regulations will set forth for qualifying as a home energy auditor. Sections 5 and 6 of specify the substantiation requirement and transition rule, respectively, that the forthcoming proposed regulations will establish for taxpayers claiming the Code Sec. 25C credit with respect to home energy audits.

In Notice-2023-59, the term "home energy audit" is defined as an inspection and written report (audit) with respect to a dwelling unit located in the United States and owned or used by the taxpayer as the taxpayer's principal residence (within the meaning of Code Sec. 121) that meets each of the following requirements:

(1) the audit identifies the most significant and cost-effective energy efficiency improvements with respect to such dwelling unit, including an estimate of the energy and cost savings with respect to each such improvement;

(2) the inspection is conducted either by a qualified home energy auditor or under the supervision of a qualified home energy auditor;

(3) the written report is prepared and signed by a qualified home energy auditor; and

(4) the audit is consistent with the most recent Department of Energy (DOE)-led and industry-validated Jobs Task Analysis.

The term "qualified home energy auditor" means an individual who is a home energy auditor that is certified by a qualified certification program at the time of the home energy audit. A "qualified certification program" is a certification program that:

(1) is reviewed and evaluated through the most recent DOE-led and industry-validated Jobs Task Analysis, demonstrating substantial alignment with key duties, tasks, knowledge, skills, and abilities of home energy auditors; and

(2) satisfies one of following standards development processes: (i) the credentials are developed and maintained in accordance with industry standards using criteria such as those cited in the Department of Labor (DOL) Training and Employment Notice No. 25-194, Attachment I, section b., or the most recent guidance from DOL on characteristics of credentials; or (ii) the program is accredited by the American National Standards Institute (ANSI), International Accreditation Service, or other qualified accreditation bodies that are in compliance with ISO/IEC 17024:2012, Conformity assessment - General requirements for bodies operating certification of persons.

The DOE maintains a list of qualified certification programs on its website. The listed qualified certification programs are the exclusive certification programs through which an auditor can qualify as a qualified home energy auditor, and that will allow a taxpayer to claim the home energy audit credit. The IRS noted that the DOE intends to update this list on a rolling basis as it identifies additional qualified certification programs.

The forthcoming proposed regulations will require a qualified home energy auditor to provide the following information in the written report required under Code Sec. 25C(e): (1) the qualified home energy auditor's name and the relevant employer identification number (EIN) or other type of relevant taxpayer identifying number as referenced in Reg. Sec. 301.6109-1(a)(1)(i) in lieu of an EIN, (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.

Substantiation Requirement

The forthcoming proposed regulations will provide that taxpayers claiming the home energy audit credit will be in compliance with the substantiation requirement under Code Sec. 25C(b)(6)(B) if they (1) maintain the written report signed by the qualified home energy auditor as a record, pursuant to the general recordkeeping and retention requirements under Code Sec. 6001 and Reg. Sec. 1.6001-1, and (2) comply with the instructions for Form 5695, Residential Energy Credits, or any successor form required by the IRS.

Transition Rule

With respect to home energy audits conducted during tax years ending after December 31, 2022, and conducted on or before December 31, 2023, a home energy auditor is not required to be a qualified home energy auditor as defined in Notice 2023-59. Therefore, taxpayers that paid or incurred expenses for a home energy audit that meets the requirements of Code Sec. 25C, and that was conducted during tax years ending after December 31, 2022, and conducted on or before December 31, 2023, may claim a home energy audit credit for such audit even if the auditor who conducted the home energy audit was not a qualified home energy auditor, as Notice 2023-59, at the time of the home energy audit. However, taxpayers may not claim a home energy audit credit for home energy audits conducted after December 31, 2023, that were not conducted by a qualified home energy auditor.

For a discussion of the energy efficient home improvement credit, see Parker Tax ¶101,505.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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