IRS issues guidance for section 25C energy efficient home improvement credit

On October 24, 2024, Treasury and the Internal Revenue Service (“IRS”) issued proposed regulations and Rev. Proc. 2024-31 to provide guidance for the section 25C energy efficient home improvement credit. For property placed in service beginning in 2023, a taxpayer may take a credit equal to 30% of the total amount paid for certain qualified energy-efficient improvements made to their home. The credit is limited to certain amounts, per taxpayer and per tax year. Beginning in 2025, for each item of specified property placed in service, no credit will be allowed unless the item was produced by a qualified manufacturer (QM) and the taxpayer includes the product identification number (PIN) for the item on the taxpayer’s tax return.

The proposed regulations provide:

• definitions of additional key terms, including the term “enabled property” and “enabling property”
• added guidance on calculating the credit
• special rules related to “enabling property”
• further direction for manufacturers who want to become a QM

Manufacturers looking to qualify as a QM should refer to Rev. Proc. 2024-31, which provides additional procedures and requirements.

The regulations are proposed to apply to taxable year ending after the final regulations are released. Taxpayers may rely on the proposed regulations for specified property placed in service prior to the date the proposed regulations are published as final regulations in the Federal Register, provided the taxpayer follows the proposed regulations in their entirety, and in a consistent manner.

Written or electronic comments to the proposed regulations must be received by Dec. 24, 2024. A public hearing on the proposed regulations is scheduled to be held on Jan. 21, 2025, at 10 a.m. with requests to speak received by Dec. 24, 2024. If no outline of topics are received by Dec. 24, 2024, the public hearing will be cancelled.

Background

The Inflation Reduction Act of 2022 (IRA) amended the existing credit for energy efficient home improvements under section 25C. In general, the credit is equal to 30% of the aggregate amounts paid for certified energy efficient products or a home energy audit. The IRA amended the credit to allow for an increase of up to $1,200 annually for qualifying property placed in service on or after Jan. 1, 2023, and before Jan. 1, 2033. However, there are exceptions where the maximum credit may be up to $3,200 depending on the mix of property installed by the taxpayer during the taxable year. See RSM US LLP’s prior alert on section 25C eligibility and credit calculations IRS releases fact sheet regarding residential energy credits.

For property placed in service after Dec. 31, 2024, no credit is allowed under section 25C for an item of specified property unless:

• The item is produced by a QM; and
• The taxpayer includes the PIN of the item on its tax return for the taxable year. 

Since the IRA, Treasury and the IRS have issued the following notices related to section 25C:

• Notice 2022-48 requesting public comments on guidance;
• Notice 2023-59 providing administrative and procedural guidance on the requirements for home energy audits; and
• Notice 2024-13 announcing intentions to issue proposed regulations to implement the PIN requirement and outlining a proposed PIN system.

See RSM US LLP’s prior alert on Notice 2022-48 IRS issues notices to request comments on energy-related incentives, Notice 2023-49 IRS and Treasury release guidance on tax credit for home energy audits; and Notice 2024-13 IRS releases guidance on PIN requirement for energy efficiency home improvement credit.

Enabled Property and Enabling Property

The proposed regulations introduced and defined key additional terms including “enabled property” and “enabling property”. The terms “enabled property” and “enabling property” are derived from section 25C(d)(2)(D)(iv). Under the proposed regulations “enabling property” is the improvements to, or replacement of, a panelboard, sub-panelboard, branch circuits or feeders, that among other requirements, is installed in conjunction with any qualified energy efficiency improvements or any other type of qualified energy property for which a section 25C credit is allowed and enables the installation and use of such property (enabled property). Generally enabling property must be installed in conjunction with, and enable the installation and use of, enabled property. However, recognizing installation in the same tax year may not always be practical, the IRS provided a safe harbor allowing taxpayers to treat enabling property and enabled property as installed in the same taxable year if placed in service in consecutive years, with the credit being applied to the later year.

Rev. Proc. 2024-31

In addition to the proposed regulations, which provide rules regarding the PIN requirements that apply to property placed in service after Dec. 31, 2024, Treasury and the IRS issued Rev. Proc. 2024-31 providing:

• the procedures that manufacturers must follow to become QMs; and
• how to comply with the QM PIN requirements.

Rev. Proc. 2024-31 was derived in part from the comments received in response to Notice 2024-13.

In general, a manufacturer of specific property must register with the IRS and enter into an agreement with the IRS, certifying under penalties of perjury that the manufacturer will meet the QM PIN requirements. This registration and agreement process is conducted through the IRS Energy Credits Online Portal. An authorized agent must submit this information on behalf of a manufacturer of specified property. Manufacturers of specified property have until April 30, 2025, to submit their QM Registration Application and Agreement (as defined in the Revenue Procedure) to be deemed to have been a QM as of Dec. 31, 2024, provided such QM Registration Application and Agreement is validated by the IRS. For all specified property placed in service in the 2025 calendar year, a QM can satisfy the PIN assignment requirement by furnishing its four character “QM Code” to consumers, who can include the QM Code on their tax returns in lieu of the PIN.

Washington National Tax takeaways

Section 25C requires unique PINs as an integral safeguard to assure that taxpayers entitled to claim the section 25C credit can do so efficiently. However, the PIN assignment requirement will present certain compliance challenges for manufacturers and taxpayers including information and strict administrative requirements.

Before calculating a potential credit, taxpayers should work with a tax advisor to review and document their eligibility for the credit. RSM can also assist manufacturers looking to become a QM.