Energy-efficient home improvement credit.

• Author: Young, Patrick L.

The Inflation Reduction Act of 2022, P.L. 117-169, expanded and renamed the nonbusiness energy property credit as the energy-efficient home improvement credit. The following discussion applies to qualifying expenditures that relate to property placed in service after Dec. 31, 2022, and prior to Jan. 1, 2033 (Sec. 25C(i)(2), as amended by the Inflation Reduction Act).

Amount of the credit

Individuals can claim a nonrefundable credit for a tax year in an amount equal to 30% of the sum of (1) the amount paid or incurred by the taxpayer for qualified energy-efficiency improvements installed during the year (known as energy-efficient building envelope components); plus (2) the amount of residential energy property expenditures (known as qualified energy property) paid or incurred by the taxpayer during the year; plus (3) the amount paid or incurred by the taxpayer during the year for home energy audits (Sec. 25C(a), as amended by the act).

For energy-efficient building envelope components, the credit is allowed only for amounts paid to purchase the components. It is not available for amounts paid for on-site preparation, assembly, or original installation of the components. In contrast, the credit for qualified energy property is allowed not only for amounts paid to purchase the property but also for costs of on-site preparation, assembly, or original installation of the property (Sec. 25C(d)(1), as amended by the act).

As a practical matter, practitioners should be aware of the types of expenditures that qualify for the credit. However, for purposes of the credit prior to the Inflation Reduction Act, the taxpayer could rely on the manufacturer's certification that an item was eligible for the credit, according to Notice 2009-53, which also contained manufacturer certification requirements for building envelope components and residential energy property expenditures. Practitioners should be alert for similar guidance from the IRS for the applicability of the energy-efficient home improvement credit under the Inflation Reduction Act.

Credit limitations

Under the Inflation Reduction Act, the lifetime maximum credit limitation that was in place under the nonbusiness energy property credit has been repealed. The energy-efficient home improvement credit is subject to the following limitations (Sec. 25C(b), as amended by the act):

* Annual overall limitation: The credit allowed for any tax year cannot exceed $1,200.

* Annual limitation for qualified...