The Inflation Reduction Act of 2022 (IRA) contained significant changes to both the Energy Efficient Home Improvement Credit under Internal Revenue Code (IRC) Section 25C and the Residential Clean Energy Property Credit under IRC Section 25D. These updated FAQs provide details on the IRA’s changes to these credits, revised as of January 17, 2025. One key update is the addition of information regarding the PIN reporting requirements for claiming these credits for assets placed in service on or after January 1, 2025.

Energy Efficient Home Improvement Credit (§ 25C)

General Overview of the Energy Efficient Home Improvement Credit

The Energy Efficient Home Improvement Credit was modified by The IRA beginning in 2023. Prior to 2023, the credit had a lifetime limit of $500. Beginning in 2023, taxpayers can claim a credit of up to $1,200 per year and there is no lifetime limit on the credit. The credit is 30% of the cost of qualified expenses and there are limits on the amount of credit taxpayers can claim each year.

Qualifying Expenditures and Credit Amount

The following expenditures are eligible for the Energy Efficient Home Improvement Credit:

1. Qualified energy efficiency improvements:

Exterior Doors- the credit is 30% of expenditures up to $250 per door for a maximum of $500.
Exterior Windows and Skylights - the credit is 30% of expenditures up to $600.
Insulation Materials or Systems and Air Sealing Materials or Systems - the credit is 30% of expenditures up to $1,200.

To be eligible, exterior windows and skylights must meet the Energy Star most efficient certification requirements. Exterior doors must meet the applicable Energy Star requirements. Insulation materials or systems must meet the 2021 International Energy Conservation Code (IECC) requirements.

2. Residential Energy Property Expenditures:

Property Subject to a $600 Cap Per Item
- Central air conditioners
- Natural gas, propane, or oil water heaters
- Natural gas, propane, or oil furnaces or hot water boilers
- Oil furnaces or hot water boilers meeting certain requirements
- Enabling property
Property Not Subject to the $600 Cap
- Electric or natural gas heat pump water heaters
- Electric or natural gas heat pumps
- Biomass stoves or boilers meeting certain requirements

Central air conditioners, natural gas, propane, or oil water heaters, and natural gas, propane or oil furnaces or hot water boilers must meet or exceed the highest efficiency tier established by the Consortium for Energy Efficiency (CEE). Split system heat pumps must meet the applicable CEE requirements as a system. Biomass stoves or boilers must have a thermal efficiency rating of at least 75%. Oil furnaces or hot water boilers must meet the 2021 Energy Star efficiency criteria and be rated for use with fuel blends that contain at least 20% eligible fuel if they are placed in service after 12/31/2022 and before 1/1/2027. If they are placed in service after December 31, 2026, they must achieve an annual fuel efficiency rate of at least 90 and be rated for use with fuel blends containing at least 50% eligible fuel.

Enabling property are improvements or replacements of panelboards, sub-panelboards, branch circuits or feeders that are installed in conjunction with other qualifying energy efficiency improvements. To be eligible, these improvements must meet the requirements of the National Electric Code and must have a load capacity of not less than 200 amps.

The Fact Sheet has a table summarizing the requirements for claiming this credit for Electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves or boilers. Here is the information from that table:

Property	Credit Limit	Energy Efficiency Requirement
Electric or natural gas heat pump water heaters	$2,000 aggregate for these three property types	Must meet or exceed the highest efficiency tier (not including any advanced tier) established by the Consortium for Energy Efficiency (CEE) that is in effect as of the beginning of the calendar year in which the property is placed in service.
Electric or natural gas heat pumps	$2,000 aggregate for these three property types	Must meet or exceed the highest efficiency tier (not including any advanced tier) established by the Consortium for Energy Efficiency (CEE) that is in effect as of the beginning of the calendar year in which the property is placed in service.
Biomass stoves or boilers	$2,000 aggregate for these three property types	Must have a thermal efficiency rating of at least 75% (measured by the higher heating value of the fuel).

The total amount of the credit is limited to $1,200 per year except for a $2,000 limit on electric or natural gas heat pumps, electric or natural gas heat pump water heaters, and biomass stoves and boilers. Therefore, a taxpayer could claim a credit of up to $3,200 per year. The annual limit for exterior doors is $500 total, and no more than $250 per door can be claimed. Exterior windows and skylights are limited to $600 in total.

Energy Efficiency Requirements

See the section above for the details of energy efficiency requirements for each item.

Qualifying Residence

The residence requirements for the credit vary depending on what expenditure is being claimed. To be eligible for the credit for exterior windows or skylights, exterior doors, and insulation materials, the expenditures must be for a home located in the United States that is owned and used by the taxpayer as their principal residence. For other residential energy property, including heat pumps, central air conditioners, heat pump water heaters, furnaces, boilers, biomass stoves, and enabling property, the home must be located in the United States and used as a residence by the taxpayer. Taxpayers can rent the home, and it can be a second home, but the expenditures cannot be for a home that is not used as a residence by the taxpayer. For home energy audits, the home must be located in the United States and owned or used by the taxpayer as a principal residence. A taxpayer can claim the credit for an energy audit on a home they rent.

For existing homes and renovations or additions to existing homes, the credit can be claimed. However, it cannot be claimed for a newly constructed home. The full credit can be claimed for a home that is used for business purposes less than 20% of the time. If the home is used for business purposes more than 20% of the time, the taxpayer can only claim a portion of the credit, prorated for the percentage of time the home is used for nonbusiness purposes.

Labor Costs

Labor costs can only be included for residential energy property expenditures including heat pumps, central air conditioners, heat pump water heaters, furnaces, boilers, biomass stoves, and enabling property. Labor costs cannot be included for qualified energy efficiency improvements including windows and skylights, exterior doors, and insulation materials or systems.

Timing of Credit

The credit cannot be carried forward to future years. If a taxpayer has unused credit because their tax liability is not high enough, that credit will be lost. Taxpayers can claim the credit in the year that they incur the qualifying expenses, assuming they meet all the other requirements for the credit. Taxpayers have three years from the date they file a return or two years from the date the tax was paid, whichever date is later, to file an amended return to claim the credit.

Qualified Manufacturers

To be eligible for the credit for any item of specified property placed in service after December 31, 2024, the specified property must be produced by a QM and the taxpayer must include a qualified product identification number (PIN) on the taxpayer’s tax return. Specified property includes qualified energy property and any property described in IRC Section 25C(3)(B) (exterior windows, including skylights) or (C) (exterior doors).

A manufacturer must register with the IRS to be considered a QM. This can be done through the IRS Energy Credits Online Portal. Manufacturers that register by April 30, 2025, will be considered QMs as of December 31, 2024.

Once a manufacturer’s application to be a QM is accepted, the IRS will assign a unique four-character QM Code to the manufacturer. This will be communicated to the manufacturer through the IRS Energy Credits Online Portal. The manufacturer must then assign a unique 17-character PIN to each item of specified property they produce. This PIN is comprised of the four-character QM Code, a single-character “Product Code”, and a 12-character item number. The product code represents the type of product, and the item number must be unique to each specific item the QM produces. The QM must report these PINs to the IRS on a quarterly basis using the IRS Energy Credits Online Portal.

PIN Requirements

Taxpayers must include the PIN for any item of specified property they place in service on or after January 1, 2025, on their tax return. For items placed in service in 2025, taxpayers can use the QM code in place of the full PIN. A full PIN is required for all specified property placed in service on or after January 1, 2026. Taxpayers must also include a PIN for enabling property, but they can use the QM code regardless of when the property was placed in service. Taxpayers may treat the enabling property and enabled property as installed in the same taxable year, if they are installed in consecutive years. The deemed taxable year must be the later of the two years.

Insulation materials are not specified property and do not require a PIN. For heat pumps with an indoor and outdoor unit, QMs are only required to assign a PIN to the outdoor unit.

The QM must provide the PIN to taxpayers no later than when the property is placed in service, when the taxpayer requests it, or when the manufacturer becomes a QM (whichever date is latest) for property placed in service on or after January 1, 2025, and before January 1, 2026. For property placed in service on or after January 1, 2026, the QM must provide the PIN no later than the date the property is placed in service or the date the taxpayer requests it, whichever is later.

General Questions

The credit is not available for used property. The credit is a nonrefundable credit, meaning that taxpayers cannot receive a refund for any amount that exceeds their tax liability. The credit can offset alternative minimum tax (AMT).

If a public utility provides a subsidy to a customer for the purchase or installation of energy conservation measures, the taxpayer cannot claim a credit for the amount of the subsidy.

The IRS will treat amounts paid with funds from the Department of Energy’s Home Energy Rebate Programs as rebates. These rebates must be subtracted from the cost of the property when calculating the credit.

Generally, state energy efficiency incentives are not treated as rebates and should not reduce the purchase price or cost of the property for purposes of calculating the credit.

Home Energy Audits

To qualify for the credit, a home energy audit must meet the requirements of Notice 2023-59. It must identify the most significant and cost-effective energy efficiency improvements for the dwelling unit and must include an estimate of energy and cost savings for each improvement. The audit must be prepared by a Qualified Home Energy Auditor who meets the certification or other requirements specified in the regulations. The audit must include the auditor’s name and EIN or other taxpayer identifying number, an attestation that they are certified by a Qualified Certification Program, and the name of that Qualified Certification Program.

The credit is claimed on Form 5695, Residential Energy Credits. Taxpayers must keep records that are sufficient to establish the amount of the credit for as long as they are relevant to the administration of any internal revenue law. This could include, for example, documentation supporting the basis reduction required under IRC Section 25C(g).

Financing costs are not included when calculating the amount of the credit.

Residential Clean Energy Property Credit (§ 25D)

General Overview of the Residential Clean Energy Property Credit

The Residential Clean Energy Property Credit is a 30% tax credit for qualifying expenditures. There is no lifetime limit on this credit. The credit is available for property placed in service after December 31, 2021, and before January 1, 2033. The credit begins to phase out in 2033, decreasing to 26% in 2033 and 22% in 2034. It is not available for property placed in service after December 31, 2034.

Qualifying Expenditures and Credit Amount

The following expenditures qualify for the Residential Clean Energy Property Credit:

qualified solar electric property expenditures (solar panels);
qualified solar water heating property expenditures (solar water heaters);
qualified fuel cell property expenditures;
qualified small wind energy property expenditures (wind turbines);
qualified geothermal heat pump property expenditures; and
qualified battery storage technology expenditures.

There is no overall dollar limit on the credit. However, there is a limit for fuel cell expenditures. The limit is $1,667 for each half kilowatt of capacity of qualified fuel cell property.

Energy Efficiency Requirements

Qualified solar water heating property must be certified by the Solar Rating Certification Corporation or a comparable entity endorsed by the state where the property is installed.
Qualified fuel cell property must have a rated capacity of at least .5 kilowatts.
Qualified geothermal heat pump property must meet the requirements of the Energy Star Program.
Qualified battery storage technology property must have a capacity of at least three kilowatt-hours.

Qualifying Residence

For qualified solar electric property expenditures, qualified solar water heating property expenditures, qualified small wind energy property expenditures, qualified geothermal heat pump property expenditures, and qualified battery storage technology expenditures, the property must be for a home located in the United States that is used as a residence by the taxpayer. The home can be rented, and it can be a second home. For qualified fuel cell expenditures, the property must be installed on or in connection with a home in the United States that is the taxpayer’s principal residence. The taxpayer may rent the home.

For both credits, the property must be used as a residence by the taxpayer. The credits cannot be used for rental property unless the taxpayer also uses it as a residence. Taxpayers can claim the credit for both new and existing homes.

Labor Costs

Labor costs can be included when calculating the credit amount. This includes costs properly allocable to the onsite preparation, assembly, or original installation of the property as well as piping or wiring to interconnect the property to the home.

Timing of Credit

Unused credit can be carried forward to future years. The credit can be claimed in the year the qualifying expenditures are incurred, assuming the other requirements for the credit are met. Taxpayers have three years from the date the original return was filed or two years from the date the tax was paid, whichever is later, to file an amended return claiming the credit.

General Questions

Used property is not eligible for the credit. The credit is nonrefundable and can only reduce a taxpayer’s liability to zero. It cannot create a refund. The credit can offset AMT.

The rules for subsidies from public utilities and rebates are the same as for the Energy Efficient Home Improvement Credit. The IRS treats payments from the Department of Energy’s Home Energy Rebate Programs as rebates, which reduce the cost of the property when calculating the credit. State incentives are generally not treated as rebates for federal income tax purposes.

The credit is claimed on Form 5695, Residential Energy Credits. Taxpayers must keep records adequate to support the credit claimed for as long as the records could be material to the administration of any internal revenue law.

Financing costs cannot be included when calculating the credit amount.

The IRS Fact Sheet can be read at https://www.irs.gov/pub/taxpros/fs-2025-01.pdf

Prepared with assistance from NotebookLM