The 25C Efficiency Tax Credit.

The Inflation Reduction Act’s (IRA) 25C Efficiency Tax Credit went into effect in January 2023.

If you haven’t begun leveraging it in your sales conversations, what are you waiting for? If it’s information you need, then keep reading this introduction to the IRA’s incentive programs as part of a six-part series.

Take the Southern PHC survey on awareness about IRA tax incentives.

First, it’s important to remember that even if your sales team hasn’t been talking about the 25C Tax Credit with customers, it doesn’t mean that homeowners won’t be calling you about it when tax season approaches. Somewhere in their tax filing process, homeowners will be asked if they made any qualifying home improvements. They will likely then circle back to you to find out if the air conditioner, furnace, heat pump, or water heater you installed is eligible for the tax credit. One way or another, it will be important to know the answer to those questions ahead of time.

The 25C Efficiency Tax Credit is only for existing, owner-occupied homes. It’s capped at 30 percent of the qualifying cost for up to $3,200 annually: up to $2,000 for heat pumps and up to $1,200 for insulation, windows/doors, water heating, furnace and other types of efficiency improvements.

Contractors will have to break out material and labor costs in their invoices for building shell improvements, as labor isn’t allowed in the total cost available for the tax credit. For HVAC, fortunately, labor can be included in the total cost. There are of course performance requirements for eligible installs, and this is where a potential upsell comes into play. Doors, windows, oil furnaces and hot-water boilers must be ENERGY STAR labeled. Insulation needs to meet IECC code requirements for the two years prior. Electric panels must meet NEC requirements and be 200 amps or more. HVAC performance requirements are based on climate zone, and you can check to see if your equipment qualifies online at ahrinet.org/certification/cee-directory.

Federal minimum standard will not qualify. When sending a good-, better- or best-proposal for work, be sure to let customers know which products will bring them the tax credit benefit.

Some additional information important to note for homeowners: they cannot carry the energy efficiency tax credit forward. This is different from the Clean Energy tax credit, where if one is owed a tax credit larger than their tax liability, the homeowner can carry it forward to the next tax year.

(For contractors who install geothermal heat pumps you are likely already aware that the Clean Energy Tax Credit was extended. It provides a 30 percent credit on labor and materials and can be carried over into subsequent tax years.)

Use It Or Lose It.

With 25C, it is a use-it or lose-it situation. The credit only applies for the tax year in which the products were installed. That said, homeowners can qualify for the max amount year-over-year. For example, let’s say one year a contractor installs a heat pump for a homeowner, and the homeowner gets the maximum tax credit of $2,000 for that heat pump. If there is an install the next year for a second heat pump in a different part of the house, the homeowner can take the 25C Tax Credit the following year for that second upgrade/install.

Depending upon the type of improvements needed, there are ways to optimize installation timing for 25C. If you have a customer for whom you might do additional work, such as insulation or a water heater install, discuss with the homeowner the timing of this work so that you can help your customer save as much money as possible (and maybe use those some of those savings to offset an upsell to better equipment).

What To Do Next.

Now that you know the details for this tax credit, let’s talk about what to do with that information. First, you should be sure that your invoice has materials and labor broken out, it includes the install date, address of home, make and model number of product (if appropriate), and qualifying performance characteristics.

This will be the backup homeowners need to demonstrate they qualify for the tax credit. I also highly recommend having a page on your website that explains the tax credit to a prospective customer. Provide at least some overview information and link directly to (or quote from) the IRS’s website (https://www.irs.gov/pub/taxpros/fs- 2022-40.pdf) for the deeper dive.

Lastly, if you don’t provide financing, consider doing so. Tax credits won’t cover the full cost of the install, and the equipment/products they apply to will be on the higher end given the efficiency requirements.

Next Up: In my next article, I will share information about the IRA’s upcoming rebate programs for electrification and whole-house energy efficiency. No state has launched these programs yet, as they are working on their grant applications for the U.S. Department of Energy to approve. That said, you should be sharing information with homeowners today on applicable utility and local government rebates.

To learn more about Pearl Certification and read other articles in this series as they become available, visit the Southern PHC Pearl Certification page.