Deciphering 25C and 25D of the Inflation Reduction Act

The Inflation Reduction Act (IRA) is the most aggressive action ever taken by our government to support a more sustainable future. This huge step forward will add over 9 million jobs and allocate billions of dollars to clean energy products through tax incentives for electric vehicles, solar, and battery storage to build a better tomorrow.

Increasing Solar Demand

The ITC prompted 10,000% growth in the solar industry when it originally passed in 2006. The passage of the IRA will further stabilize the business of solar through 25D by not only increasing the tax credit from 26% to 30% but by extending it through 2032. In 2033 it will decrease to 26% and in 2034 to 22%, ultimately expiring after 2034.

Both 25C and 25D are non-refundable tax credits that can be used to offset your customers' overall tax liability. While a refund won’t be offered, the Residential Clean Energy Property Credit, or 25D, can be used retroactively for the 2022 tax year and can be rolled forward to the following tax year if taxes are not owed, as long as the ITC is in effect. The 30% tax credit also has no cap and applies to systems purchased in 2021 but not installed until 2022. Solar panels, solar water heaters, and geothermal heat pumps apply. Battery storage with the capacity of at least 3 KW is also eligible if placed in service starting in 2023, and a connection to solar panels is no longer required. The Energy Efficient Home Improvement Credit, 25C, was previously capped at $500 but has increased to a 30% credit capping at $3,200 annually on energy-saving renovations. This is a yearly tax credit maximum for all building envelope components, home energy audits, and residential energy property, such as central air conditioning. Other residential energy property also includes, but is not limited to, water heaters, furnaces, and boilers running on natural gas, propane, or oil. While it can’t be rolled forward, that is still great news for your customers’ tax bills and great news for your business!

“Solar contractors will have to better understand and manage the 25C tax credits that can positively impact their solar packages that ‘reduce’ energy,” said Casey Murphy, Pearl’s SVP of Incubation. 

Please check out the IRS Fact Sheet for more detailed information on the tax credits, including a more detailed list of efficiency requirements and what qualifies as “energy property.”

Show Me MORE Money

Homeowners investing in solar can also benefit from two other IRA-sponsored rebate programs. The High-Efficiency Electric Homes program can be used to expand their home’s electrification. Additionally, the HOMES program will provide rebates that reward homeowners who reduce the energy consumption of their homes by 15% or more. Both programs will pay rebates, not tax credits, for eligible improvements and will be governed by state energy offices.

Doing Business in the USA

The legislation and ITC further support the economy by offering a 10% bonus credit for the ITC in Section 48 and the Production Tax Credit, or PTC, in Section 45. The Build America, Buy America Act requires “any steel, iron, or manufactured product component be produced in the United States” to be eligible for the tax credit. The Secretary of the Treasury may provide exceptions “where the inclusion of domestic products increases the overall cost of construction by more than 25 percent, or relevant products are not produced in the United States in sufficient and reasonably available quantities or of a satisfactory quality.”

Supporting Our Workers

There are specific labor requirements for solar and storage installations of 1 MW or more; by default, the tax credit is 6%. Laborers and mechanics installing the projects must be paid prevailing wages and be part of an electrical apprenticeship program to be eligible for an additional 24%. This rule for tax credits will begin to apply to projects in 2023.

The Department of Labor or applicable State apprenticeship agency also requires contractors or subcontractors who employ more than four individuals performing construction, alteration, or repair work to have at least one qualified apprentice to perform such work. Violations will result in fines by the Secretary of Labor of $5,000 for each laborer or mechanic who is underpaid; if the underpayment is deemed intentional, the fine doubles to $10,000 for each laborer or mechanic.

What’s Available Now?

The 25C and 25D tax credits for qualifying energy-efficiency projects are available to your customers now. Examples of qualifying projects under 25C include windows, doors, heating, and cooling equipment, and building envelope improvements, such as insulation and air sealing. The total annual credit for 25C is capped at $1,200, with an additional annual limit of $2,000 for heat pumps. Tax credits under 25C are available for up to 30% of the cost of residential clean energy equipment, including eligible battery storage. 

Please review the IRS Fact Sheet for more detailed information on the tax credits, including a more detailed list of efficiency requirements and what qualifies as “energy property.”

How Do I Participate?

You can participate if you work in the solar industry or install heat pumps and other qualifying equipment! The tax credits through 25C and 25D are available for all qualifying work. Even if you’re not telling your customers about the tax credits, their tax professionals may. It’s important to start tracking your work this year so you aren’t inundated with customers looking for documentation for their new equipment when they prepare their taxes next year. Solar installations from 2022 are also eligible for the 30% ITC; be prepared to field questions regarding those qualifying installations as well.

Pearl can help! Upload copies of invoices and efficiency documents of your work to Green Door; so they will be there when your customers need them. Contact your Relationship Manager to learn more.

When asked how the selling landscape might change now that the 30% tax credit has been expanded and extended, Derek Estes, Vice President of Pearl’s Contractor Division, responded, “I expect that the general demand for solar will continue to strengthen as people look for savings in a tight economy. We expect supply chain issues to ease, but there may still be intermittent challenges. While the ITC credit will help keep demand strong, we expect it will also be a beacon for an increasing number of lower-quality contractors to appear in the market, so high-quality operators should look for new ways to boost differentiation.”

Please contact your Relationship Manager or email [email protected] with questions.

Pearl Certification does not provide tax preparation services and does not guarantee that you or your customers qualify for these or other tax credits. Please consult a qualified tax professional.