One of the credits introduced by the Inflation Reduction Act is a credit for obtaining a home energy audit on the taxpayer's principal residence. In Notice 2023-59,[1] the IRS announced its intention to issue regulations under this provision and provided interim guidance that taxpayers can rely on until such regulations are published.

At the same time, the IRS issued a news release, IR-2023-140,[2] explaining the guidance outlined in the notice.

How the Home Energy Audit Credit Works

Under IRC §25C taxpayers can obtain a credit equal to 30% of qualifying amounts paid during the year subject to various limits on the maximum amount of credits that can be claimed. For most items, there’s both a category level limit (the most credit that can be claimed for expenditures for that category) as well as overall $1,200 total limit for the credit for most expenditures, an overall limit that does apply to the home energy audit along with the limit of no more than $150 in credit for payments related to a home energy audit.

The Notice describes such an audit as follows:

Section 25C(e) defines the term “home energy audit” as 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 § 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 by the Secretary of the Treasury or her delegate (Secretary) in regulations or other guidance.[3]

The Notice outlines the dollar limitations on the credit as specified under the law.

The IRA also imposed two limitations on this credit. First, as described above, § 25C(b)(6)(A) limits the credit allowed for amounts paid or incurred by the taxpayer during the taxable 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 taxable year may only claim a $150 credit for such taxable 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 § 25C credit during the taxable year. Second, § 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”.[4]

The IRS had previously released a Fact Sheet explaining home energy audits (FS-2022-40) in December 2022. The Notice provides details from this Fact Sheet[5] that are further expanded upon in the Notice itself.

The Treasury Department and the IRS published a Fact Sheet (FS-2022-40) on December 22, 2022, addressing “frequently asked questions about energy efficient home improvements and residential clean energy property credits.” This Fact Sheet provides that a qualifying home energy audit “must include an inspection of a dwelling, including condominiums and certain manufactured homes, located in the United States that is owned or used by the taxpayer as the taxpayer’s principal residence. The home energy auditor must provide a written report (to the taxpayer) that identifies the most significant and cost-effective energy efficiency improvements for that dwelling, including an estimate of the energy and cost savings for each such improvement. The auditor must meet the certification or other requirements specified by the Department of the Treasury and the Internal Revenue Service in forthcoming guidance.” The Fact Sheet also clarifies that the § 25C credit with respect to home energy audits may be claimed by a taxpayer renting a home as their principal residence provided such home is located in the United States.[6]

Interim Guidance - Definitions

The Notice contains definitions of four key terms. These definitions apply specifically for the purposes of this Notice and the corresponding law, rather than aligning with what one might expect from how these terms would be used in general language.

The first defined term is “Home Energy Audit Credit”. The definition in the notice states:

The term “Home Energy Audit Credit” means the § 25C credit allowed to individuals by reason of § 25C(a)(3) equal to 30 percent of the amount paid or incurred for Home Energy Audits in the taxable year, up to $150 per taxable year.[7]

The second defined term is “Home Energy Audit” where the definition provides:

The term “Home Energy Audit” means 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 § 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.[8]

In a footnote, the Notice provides the following information on the final requirement.

The Single-Family Energy Auditor Job Task Analysis and a Multifamily Energy Auditor Job/Task Analysis and Report were developed by the National Renewable Energy Laboratory. Public comment informed the development of these documents. See Workforce Guidelines for Home Energy Upgrades, 75 FR 68781 (Nov. 9, 2010), available at: https://www.federalregister.gov/documents/2010/11/09/2010-28289/workforce-guidelines-for-home-energy-upgrades.[9]

The third definition is for a Qualified Home Energy Auditor and the definition provides:

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.[10]

The fourth definition is for a Qualified Certification Program and it provides:

The term “Qualified Certification Program” means a certification program described in section 4.03 of this notice.[11]

Section 4.03 of the Notice contains the following guidance, referenced in the definition:

A Qualified Certification Program is a certification program that satisfies the criteria described in section 4.03(1) and (2) of this notice for certifying home energy auditors and that is included in the list described in section 4.04 of this notice.

(1) The certification program must be 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.

(2) The certification program must satisfy one of following standards development processes:

(a) 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

(b) 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.[12]

The Qualified Certification Program List referenced in Section 4.03 reads as follows in Section 4.04:

The list of Qualified Certification Programs is maintained by the DOE at the following web address: https://www.energy.gov/eere/buildings/25c-energy-efficient-home-improvement-credit. 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. DOE intends to update the list on a rolling basis as it identifies additional Qualified Certification Programs.[13]

Interim Guidance – Certifications and Other Requirements for Qualified Home Energy Auditors

The Notice provides the following general rule for obtaining the credit:

Except as otherwise provided in section 6 of this notice, the forthcoming proposed regulations would provide that a taxpayer may claim the Home Energy Audit Credit for a taxable year only if the taxpayer pays or incurs amounts for a Home Energy Audit.[14]

The exception noted involves the special transition rules found in Section 6 of the Notice. Those rules are provided because it would be unfair to require a home energy audit underway in 2023, or that will begin in the near future, to have to meet the requirements that have just been published. Because of that, Section 6 provides the following transition rule:

With respect to home energy audits conducted during taxable 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 section 3.03 of this notice. Therefore, taxpayers that paid or incurred expenses for a home energy audit that meets the requirements of § 25C, and that was conducted during taxable 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 defined in section 3.03 of this notice, 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.[15]

A written report must be provided by the Qualified Home Energy Auditor, and it must contain the following information:

(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 § 301.6109-1(a)(1)(i) of the Procedure and Administration Regulations (26 CFR part 301) 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.[16]

A footnote to item (1) contains the following special rule:

If the Qualified Home Energy Auditor is acting in his or her capacity as a partner in a partnership, or as an employee of any person, whether an individual, corporation, or partnership, the relevant EIN is the EIN of the partnership or the person who employs the Qualified Home Energy Auditor.[17]

Interim Guidance – Substantiation Requirement

The Notice provides in Section 5 the following substantiation requirements that a taxpayer must comply with, or risk losing the entire credit under IRC §25C(b)(6)(B):

The forthcoming proposed regulations would provide that taxpayers claiming the Home Energy Audit Credit would be in compliance with the substantiation requirement under § 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 § 6001 and §1.6001-1, and (2) comply with the instructions for Form 5695, Residential Energy Credits, or any successor form required by the IRS.[18]

Future Proposed Regulations and Interim Reliance

The IRS does not intend for this Notice to be the final IRS guidance on this credit, rather giving relatively rapid interim guidance pending the issuance of regulations.

The Treasury Department and the IRS also intend to propose that the forthcoming proposed regulations would apply to taxable years ending after December 31, 2022. Until the issuance of the forthcoming proposed regulations, taxpayers may rely on the rules described in sections 3 through 6 of this notice.[19]

[1] Notice 2023-59, August 4, 2023, https://www.irs.gov/pub/irs-drop/n-23-59.pdf (retrieved August 4, 2023)

[2] “Home energy audits may qualify for an Energy Efficient Home Improvement Credit,” IRS News Release IR-2023-140, August 4, 2023, https://www.irs.gov/newsroom/home-energy-audits-may-qualify-for-an-energy-efficient-home-improvement-credit (retrieved August 4, 2023)

[3] Notice 2023-59, August 4, 2023

[4] Notice 2023-59, August 4, 2023

[5] “Frequently asked questions about energy efficient home improvements and residential clean energy property credits,” FS-2022-40, December 2022, https://www.irs.gov/pub/taxpros/fs-2022-40.pdf (retrieved August 4, 2023)

[6] Notice 2023-59, August 4, 2023

[7] Notice 2023-59, August 4, 2023

[8] Notice 2023-59, August 4, 2023

[9] Notice 2023-59, August 4, 2023

[10] Notice 2023-59, August 4, 2023

[11] Notice 2023-59, August 4, 2023

[12] Notice 2023-59, August 4, 2023

[13] Notice 2023-59, August 4, 2023

[14] Notice 2023-59, August 4, 2023

[15] Notice 2023-59, August 4, 2023

[16] Notice 2023-59, August 4, 2023

[17] Notice 2023-59, August 4, 2023

[18] Notice 2023-59, August 4, 2023

[19] Notice 2023-59, August 4, 2023