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Proposed Regs Implement IRA Changes to Energy Efficient Home Improvement Credit
(Parker Tax Publishing October 2024)
The IRS issued proposed regulations regarding the energy efficient home improvement credit under Code Sec. 25C, as modified by the Inflation Reduction Act of 2022 (Pub. L. 117-169). The IRS also issued a registration and written agreement procedure that a manufacturer of specified property must follow to be treated as a qualified manufacturer under Code Sec. 25C(h). REG-118264-23; Rev. Proc. 2024-31.
Background
Code Sec. 25C was enacted in 2005 to provide a nonbusiness energy property credit for the purchase and installation of certain energy efficient improvements in a taxpayer's principal residence. Congress has amended Code Sec. 25C several times, most recently by the Inflation Reduction Act of 2022 (IRA) (Pub. L. 117-169), which renamed this provision the energy efficient home improvement credit.
As amended by the IRA, Code Sec. 25C allows an individual taxpayer (taxpayer) a credit for the tax year (Section 25C credit) equal to 30 percent of the total amount paid or incurred by the taxpayer during such tax year for qualified energy efficiency improvements installed during such tax year, residential energy property expenditures, and home energy audits.
The amount of the Section 25C credit generally is limited under Code Sec. 25C(b)(1) to $1,200 with respect to any taxpayer for any tax year. Within this $1,200 limitation, Code Sec. 25C(b) sets forth further annual limitations for certain categories of improvements. Code Sec. 25C(b)(2) provides that the credit allowed under Code Sec. 25C(a)(2) is limited to $600 with respect to any taxpayer for any tax year with respect to any item of qualified energy property. Code Sec. 25C(b)(3) provides that the credit allowed under Code Sec. 25C(a)(1) with respect to any taxpayer for any tax year is limited to $600 in the aggregate with respect to all exterior windows and skylights. Code Sec. 25C(b)(4) provides that the credit allowed under Code Sec. 25C(a)(1) with respect to any taxpayer for any tax year is limited to $250 in the case of any exterior door and $500 in the aggregate with respect to all exterior doors. Code Sec. 25C(b)(6) limits the credit allowed under Code Sec. 25C(a)(3) for a home energy audit to $150.
Additionally, notwithstanding the general $1,200 annual limitation (and its internal limitations), Code Sec. 25C(b)(5) provides that the credit allowed under Code Sec. 25C(a)(2) with respect to any taxpayer for any tax year is limited to $2,000 in the aggregate with respect to amounts paid or incurred for an electric or natural gas heat pump water heater described in Code Sec. 25C(d)(2)(A)(i), an electric or natural gas heat pump described in Code Sec. 25C(d)(2)(A)(ii), and a biomass stove or boiler described in Code Sec. 25C(d)(2)(B). Therefore, a taxpayer may claim a total Section 25C credit of $3,200, if the taxpayer has sufficient expenditures in categories of property (or a home energy audit) subject to the $1,200 limitation and in categories of property subject to the $2,000 limitation.
Qualified Energy Efficiency Improvements and Residential Energy Property Expenditures
Code Sec. 25C(c)(1) provides that the term "qualified energy efficiency improvements" means any "energy efficient building envelope component" if such component is installed in or on a dwelling unit located in the United States and owned and used by the taxpayer as the taxpayer's principal residence (within the meaning of Code Sec. 121), the original use of such component commences with the taxpayer, and such component reasonably can be expected to remain in use for at least 5 years. Code Sec. 25C(c)(2) provides that the term "energy efficient building envelope component" means a building envelope component that meets certain energy efficiency requirements. Code Sec. 25C(c)(3) provides that the term "building envelope component" means any insulation material or system, including air sealing material or system, which is specifically and primarily designed to reduce the heat loss or gain of a dwelling unit when installed in or on such dwelling unit, exterior windows (including skylights), and exterior doors.
Code Sec. 25C(d)(1) provides that the term "residential energy property expenditures" means expenditures made by the taxpayer for "qualified energy property" that is installed on or in connection with a dwelling unit located in the United States and used as a residence by the taxpayer, and that is originally placed in service by the taxpayer. Code Sec. 25C(d)(1) also provides that residential energy property expenditures include expenditures for labor costs properly allocable to the onsite preparation, assembly, or original installation of the property. Code Sec. 25C(d)(2) provides that the term "qualified energy property" means several categories of property that satisfy certain energy efficiency standards and other requirements.
Qualified Manufacturers and Product Identification Number Requirements
Code Sec. 25C(h) provides that no Section 25C credit is allowed with respect to any item of specified property that is placed in service after December 31, 2024, unless the item of specified property is produced by a "qualified manufacturer" (QM) and the taxpayer includes the "qualified product identification number" (PIN) of the item of specified property on the tax return for the tax year (PIN requirements). Code Sec. 25C(h)(2) provides that the term "qualified product identification number" means, with respect to any item of specified property, the product identification number assigned to such item by the QM pursuant to the methodology referred to in Code Sec. 25C(h)(3).
Code Sec. 25C(h)(3) provides that the term "qualified manufacturer" means any manufacturer of specified property that enters into an agreement with the IRS that provides that such manufacturer will: (1) assign a unique product identification number to each item of specified property produced by such manufacturer (PIN assignment requirement); (2) label such item with such product identification number in such manner as the IRS may provide (PIN labeling requirement); and (3) make periodic written reports to the IRS of the product identification numbers so assigned and including such information as the IRS may require with respect to the items of specified property to which such product identification numbers were so assigned (periodic written report requirement). The PIN assignment requirement, the PIN labeling requirement, and the periodic written report requirement are collectively referred to as the "QM PIN requirements."
Specified Property
Code Sec. 25C(h)(4) provides that the term "specified property" means any qualified energy property and any property described in Code Sec. 25C(c)(3)(B) (exterior windows, including skylights) or (C) (exterior doors). Code Sec. 25C(d)(2) provides that the term "qualified energy property" means any of the following:
(A) Any of the following that meet or exceed the highest efficiency tier (not including any advanced tier) established by the Consortium for Energy Efficiency that is in effect as of the beginning of the calendar year in which the property is placed in service: (i) an electric or natural gas heat pump water heater, (ii) an electric or natural gas heat pump, (iii) a central air conditioner, (iv) a natural gas, propane, or oil water heater, and (v) a natural gas, propane, or oil furnace or hot water boiler.
(B) A biomass stove or boiler that (i) 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 (ii) has a thermal efficiency rating of at least 75 percent (measured by the higher heating value of the fuel).
(C) Any oil furnace or hot water boiler that (i) is placed in service after December 31, 2022, and before January 1, 2027, and (I) meets or exceeds 2021 Energy Star certified efficiency criteria, and (II) is rated by the manufacturer for use with fuel blends at least 20 percent of the volume of which consists of an eligible fuel (defined in Code Sec. 25C(d)(3)) (eligible fuel), or (ii) is placed in service after December 31, 2026, and (I) achieves an annual fuel utilization efficiency rate of not less than 90, and (II) is rated by the manufacturer for use with fuel blends at least 50 percent of the volume of which consists of an eligible fuel.
(D) Any improvement to, or replacement of, a panelboard, sub-panelboard, branch circuits, or feeders that (i) is installed in a manner consistent with the National Electric Code, (ii) has a load capacity of not less than 200 amps, (iii) is installed in conjunction with (I) any qualified energy efficiency improvements, or (II) any qualified energy property described in Code Sec. 25C(d)(2)(A) through (C) for which a credit is allowed under Code Sec. 25C for expenditures with respect to such property, and (iv) enables the installation and use of any qualified energy efficiency improvements or any qualified energy property described in Code Sec. 25C(d)(2)(A) through (C) for which a credit is allowed under Code Sec. 25C for expenditures with respect to such property.
Prior Guidance
In Notice 2022-48, the IRS requested comments on the amendments to Code Sec. 25C made by the Inflation Reduction Act. In Notice 2023-59, the IRS provided requirements related to home energy audits under Code Sec. 25C(a)(3) intended to be included in forthcoming proposed regulations. In Notice 2024-13, the IRS outlined a proposed PIN system that would require manufacturers to register with the IRS as QMs and to assign 17-digit PINs to specified property.
REG-118264-23
On October 24, the IRS issued proposed regulations that provide general guidance on the Section 25C credit, including what property qualifies for the credit and what limitations apply.
In Prop. Reg. Sec. 1.25C-1(b)(5) and (6), the proposed regulations introduce and define the terms "enabled property" and "enabling property," which are derived from Code Sec. 25C(d)(2)(D)(iv). To simplify the rules in Code Sec. 25C(d)(2)(D), the proposed regulations refer to improvements to, or replacement of, a panelboard, sub-panelboard, branch circuits, or feeders as "enabling property," and the property the enabling property is installed in conjunction with as "enabled property."
Prop. Reg. Sec. 1.25C-3 provides a special rule and a safe harbor regarding enabling property and enabled property. There may be circumstances where enabled and enabling property cannot be installed in the same tax year. For example, a taxpayer or third-party installer may not know of the need for an upgrade to a panelboard at the time that enabled property is installed. Alternatively, the installer may not have enabling property available when the enabled property is installed (but the enabled property is otherwise functional). Under Prop. Reg. Sec. 1.25C-3(b)(1), enabling property will be considered to have been installed in conjunction with enabled property if it was installed in the same tax year as the enabled property was installed. Prop. Reg. Sec. 1.25C-3(b)(2) provides a safe harbor providing that if enabling property and enabled property are installed in consecutive tax years, then the taxpayer may treat the enabling property and the enabled property as installed in the same tax year (deemed tax year), provided that the deemed tax year is the later of the tax year in which the enabling property or the enabled property was installed, regardless of which is installed first. The safe harbor allows flexibility for taxpayers while adhering to the statutory requirement that enabling property enable the installation and use of, enabled property.
Prop. Reg. Sec. 1.25C-4(a) provides that no Section 25C credit is allowed with respect to any item of specified property placed in service after December 31, 2024, unless such item is produced by a QM and the taxpayer includes the PIN of such item on the return of tax for the tax year. Prop. Reg. Sec. 1.25C-4(a) also summarizes the rules for manufacturers of specified property to meet the QM PIN requirements. Prop. Reg. Sec. s1.25C-4(b)(1) provides that for a manufacturer of specified property to become a QM, the manufacturer must, in accordance with Prop. Reg. Sec. 1.25C-4(b) and IRS guidance (specifically, Rev. Proc. 2024-31), register with the IRS and enter into an agreement with the IRS, certifying under penalties of perjury that the manufacturer will meet the QM PIN requirements.
Rev. Proc. 2024-31
In Rev. Proc. 2024-31, the IRS provides the procedures that a manufacturer of specified property must follow to be treated as a QM under Code Sec. 25C(h). Generally, manufacturer that wishes to become a QM must register and enter into an agreement with the IRS, assign a PIN unique to each item of specified property, label such items, and make periodic written reports to the IRS of the PINs so assigned. This registration and agreement process is conducted through the IRS Energy Credits Online Portal.
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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