Executive summary: New requirements for the home energy audits
On Aug. 4th, the IRS and The Department of the Treasury (Treasury) released Notice 2023-59 which provides administrative and procedural guidance on the requirements for home energy audits for purposes of calculating the energy efficient home improvement credit under Internal Revenue Code section 25C. Prior to the release of the notice, the IRS released Fact Sheet 2022-40 which provides background information and answers to frequently asked questions with respect to the energy efficient home improvement credit. Treasury and the IRS intend to issue proposed regulations on the energy efficient home improvement credit. Until the issuance of such guidance, taxpayers can rely on sections 3 through 6 of the new notice with respect to the definitions related to home energy audits, certifications and/or requirements for home energy auditors, substantiation requirements for home energy audits and the transition rule for home energy audits conducted after Dec. 31, 2022, and on and before Dec. 31, 2023.
IRS and Treasury release guidance on tax credit for home energy audits
Energy efficient home improvement credit
The Inflation Reduction Act (IRA) amended the existing energy efficient home improvement credit to implement a 30% credit percentage and add new types of qualifying expenditures to be included within the scope of the credit. For property placed in service on or before Dec. 31, 2022, the allowable credit was 10% of amounts paid or incurred for certain qualified energy efficiency improvements plus the amount of certain residential energy property expenditures paid or incurred during the taxable year. As modified by the IRA, for property placed in service after Dec. 31, 2022, the credit is generally equal to 30% of the aggregate amounts paid for qualifying expenditures.
For property placed in service after Dec. 31, 2022, qualifying expenditures include:
- Amounts paid or incurred by the taxpayer for qualified energy efficient improvements installed during the tax year;
- Residential energy property expenditures paid or incurred during the tax year; and
- Home energy audit expenditures incurred during the tax year.
Qualifying residential energy improvement expenditures include certain exterior windows and skylights, exterior doors, roofs and insulation materials. Qualifying residential energy property expenditures generally include expenditures for central air conditioners, natural gas; propane; or oil water heaters; furnaces; or hot water boilers, improvements to, or replacements of, panelboards; subpanel boards; branch circuits; or feeders, electric or natural gas heat pumps or heat pump water heaters, as well as biomass stoves or boilers. Requirements, such as those related to the property’s energy efficiency, may apply to each energy efficient improvement or residential energy property expenditure.
Expenditures for home energy audits conducted after Dec. 31, 2022, may qualify for the energy efficient home improvement credit. Qualifying home energy audits must include an inspection and written report with respect to a dwelling unit located in the United States and owned or used by the taxpayer as a principal residence. The report must identify the most significant and cost-effective energy efficiency improvements with respect to such dwelling. An estimate of the energy and cost savings must be included. The audit must be conducted and prepared by a home energy auditor that meets certain requirements specified by Treasury. This notice and the forthcoming proposed regulations provide those requirements.
The credit imposes several limitations that vary based on the type of qualifying expenditure paid or incurred. There is an aggregate annual $2,000 dollar credit limitation for biomass stoves and boilers, electric or natural gas heat pump water heaters and electric or natural gas heat pumps. All other qualifying expenses are subject to an aggregated annual $1,200 limitation. The mix of expenditures subject to the maximum annual limitation of $1,200 are subject to additional annual limitations. For example, qualified home energy audit expenditures are limited to $150. If a taxpayer incurs $1,000 dollars of qualified home energy audit expenditures, the 30% credit is capped at $150 with respect to these expenditures. In total, a taxpayer paying or incurring certain mixes of qualifying expenditures can potentially qualify for up to $3,200 in energy efficient home improvement credits per year. For property placed in service on or before Dec. 31, 2022, separate limitations applied, and the energy efficient home improvement credit included a lifetime maximum credit of $500.
New requirements for home energy audits
The notice outlines definitional and procedural guidance with respect to home energy audit expenditures paid or incurred by the taxpayer. The notice provides definitions for the following terms that will be applicable to home energy audits:
- Home Energy Audit Credit
- Home Anergy Audit
- Qualified Home Energy Auditor
- Qualified Certification Program
The inspection must be conducted by either a Qualified Home Energy Auditor or under the supervision of a Qualified Home Energy Auditor. Qualified auditors are individuals who are certified by a Qualified Certification Program at the time of the audit. The Department of Energy (DOE) has created a website that lists Qualified Certification Programs. Qualified Certification Programs are subject to certain requirements contained in the notice. Written reports must include the Qualified Home Energy Auditor’s identifying information, the name of the Qualified Certification Program of which the auditor is certified, and an attestation statement and signature. Substantiation requirements for the credit will include the written report signed by the Qualified Home Energy Auditor pursuant to general recordkeeping and retention requirements under section 6001 & Treas. Reg. section 1.6001-1 and compliance with Form 5695.
The notice creates a safe harbor for energy audits conducted by auditors other than Qualified Home Energy Auditors for home energy audits conducted after Dec. 31, 2022, and on or before Dec. 31, 2023. Taxpayers who paid or incurred expenses during this timeframe for home energy audits that meet the requirements of the energy efficient home improvement credit may be eligible even if they do not meet the new requirements contained in this notice.
Washington National Tax takeaways
There are several Federal, state, and local tax credits, incentives, and other rebates available for energy efficient home improvements. A home energy audit may help taxpayers identify eligible home improvements that may qualify for credits and incentives.
This notice provides additional insight on the substantiation and procedural requirements for claiming the energy efficient home improvement credit for qualified home energy audit expenditures. Taxpayers making energy efficient improvements to their homes will now have a better understanding of the procedures and information that will need to be collected in order to claim a credit for qualified home energy audit expenditures. Until the IRS and Treasury release proposed regulations with respect to the energy efficient home improvement credit, taxpayers may rely on sections 3 through 6 of the notice to calculate, substantiate and document qualifying expenditures incurred in connection with a home energy audit. Taxpayers should consult with their tax advisors prior to claiming tax credits for expenses incurred in conjunction with efficient home energy improvements.