Inflation Reduction Act – Frequently Asked Questions
Please note that information is still forthcoming and evolving. There are several unknowns at the state level, and changes are inevitable.
What is the Inflation Reduction Act (IRA)?
To help reduce inflation, decrease carbon emissions, and more, the U.S. Government has passed the Inflation Reduction Act (IRA), which includes several tax credits for installing ENERGY STAR® certified home heating and cooling products. The IRA consists of rebates and tax credits for HVAC.
What is the difference between IRA rebates and tax credit offerings?
There are two rebate programs available. Rebates are administered at the state level and favor lower-income households. Federally funded rebates cannot be combined and are intended for immediate, point-of-sale benefit.
There are four tax credits available. Tax credits are federal income tax credits available to anyone with taxable income. Tax credits can be combined, and rebates can be filed for the following calendar/tax year.
What are the tax credits included in the Inflation Reduction Act?
- Tax Section 25C: Nonbusiness Energy Property Credit – Provides a tax credit to homeowners equal to 30% of installation costs for the highest efficiency tier products, up to a maximum of $600 for qualified air conditioners and furnaces and a maximum of $2,000 for qualified heat pumps.
- Tax Section 25D: Residential Energy Efficient Property – Provides a tax credit to homeowners equal to 30% of installation costs for ENERGY STAR® geothermal heat pumps until 2032. That percentage drops to 26% in 2033 and 22% in 2034.
- Tax Section 45L: New Energy Efficient Home Credit – Provides tax credits to builders for meeting specific energy-saving criteria. The tax credits for ENERGY STAR 3.1 certified housing are $2,500 for single-family homes and $500 for multi-family units. To meet the DOE’s Zero Energy Ready requirements, the tax credit increases to $5,000 for single-family and $1,000 for multi-family residences. If prevailing wage requirements are met on multi-family construction, those credits increase to $2,500 and $5,000.
- Tax Section 179D: Commercial Buildings Energy-Efficiency Tax Deduction – Provides a tax deduction for building owners installing qualifying systems in buildings. Up to $14,000 maximum for all.
What are the rebates included in the IRA?
- High-Efficiency Electric Home Rebate Program – Provides income-dependent rebates to low to moderate-income (LMI) homeowners, including:
- Up to $8,000 for all-electric heat pumps
- Up to $4,000 for electrical load service center
- Up to $2,500 for electric wiring
- HOMES Rebate – Provides rebates for energy efficiency upgrades that improve a home’s overall energy performance.
How should dealers leverage this opportunity?
Research the potential tax credits available, the efficiency requirements to earn the credit and the products that meet those criteria. Then, communicate those potential incentives in every sales presentation.
What is CEE?
The Consortium for Energy Efficiency (CEE) is an award-winning non-profit comprised of U.S. and Canadian energy efficiency administrators working together to accelerate the development and availability of energy-efficient products and services.
What are the CEE specifications and tiers?
The CEE equipment specifications for air conditioners, heat pumps, and furnaces can be found here:
What is LMI?
Low-to-Moderate Income (LMI) is based on the area median income (AMI).
Do you have a breakdown on what tax credit the homeowner will receive based on income?
Please refer to the TM Webinar Deck for a breakdown of the income levels required for rebate qualification.
What constitutes a cold climate heat pump?
The performance requirements for ENERGY STAR and cold climate heat pumps can be found at the ENERGY STAR website.
Do the heat pump and furnace count for 25C – $2,600 credit, or is it capped at $2,000?
Our understanding is that if both units meet the criteria, both items can be claimed. Please consult with your tax professional for more information.
Is there a lifetime cap for a homeowner on this funding?
25C does not have a lifetime cap, but the program expires in 2032.
Where does the money for 25C come from?
25C is a federal tax credit. The rebate programs, though federally funded, are administered at the state level and funded separately from the IRA.
Is the 25C a $3,200 one-time cap, or is it a yearly cap?
There is no lifetime cap, but there is an annual cap of $1,200 for qualifying products and a separate annual cap of $2,000 for heat pumps. Combined, a homeowner could receive up to $3,200 per year.
QUALIFICATIONS
Is the tax credit based on a system combo installation? Can you qualify with just a heat pump only installation?
The IRS intends for a qualifying system. If the IRS requires an AHRI certification number, then a heat pump would have to be installed as part of a matching system.
Does AHRI state if a match-up is eligible for tax credit?
AHRI has not updated their site to match the 2023 tax requirements or ENERGY STAR 6.1 requirements.
What rating do we use if there is mixed equipment?
All requirements for 2023 installations reference M1 ratings. There is no direction yet for mixed M-rated equipment.
How does the new IRA tax credit work in homes with multiple systems?
Regardless of the number of systems, the taxpayer is limited by the annual limit. To maximize the tax benefit, systems should be installed in different years.
STATE REBATES / Point of Sale
Can Federal rebates be combined with state rebates like NYS Clean Heat?
Federal rebates cannot be combined with other federally funded rebate programs included in the IRA.
Will dealers have to require financial records at point-of-sale?
We do not know this information at this time.
How are dealers supposed to administer a POS rebate without verifying household income?
Each state will determine this process.
Are contractors expected to float thousands of dollars until funded by the state government?
Each state will determine this process.
TIMING
Will customers seeking to take advantage of the rebate programs for 2023 installations be able to retroactively apply once their state establishes the program?
No information is available yet. This will be decided at the state level.
Are tax credits retroactive to 2022?
2022 installations that qualified based on 2022 criteria can be filed for credit in the 2023 tax year. 2023 installations must meet 2023 criteria and would be filed in 2024.
Is there any indication from the IRS that there will be a lifetime limit on payouts?
Please consult your tax professional for more information.
Talking Points
Dealers should renew efforts in selling higher-efficiency systems by researching the potential tax credits available and the products that meet the efficiency requirements to earn the credit. Then communicate potential incentives in every sales presentation and reach out to customers who installed qualifying systems in 2022, as they may qualify for credits as well.
