When the Inflation Reduction Act (IRA) was signed into law in August, many of us recognized that it contained provisions that could greatly benefit the construction industry. The new law is expected to have a substantial impact on the residential construction industry, largely because of how it has created or expanded various clean-energy tax incentives. These credits make improvements more affordable and customers more likely to plan or expand home improvement projects.
Energy Efficient Home Improvement Credit
The Nonbusiness Energy Property Tax Credit was extended through 2032 and renamed the Energy-Efficient Home Improvement Credit. Starting in 2023, the credit will be equal to 30 percent of the costs (previously 10 percent) of all eligible home improvements made during the year. Additionally:
- The $500 lifetime limit on the total credit amount will be replaced with a $1,200 annual limit!
- The annual limits for specific types of qualifying improvements will be:
- $250 for any exterior door ($500 total for all exterior doors) that meet applicable ENERGY STAR requirements;
- $600 for exterior windows and skylights that meet ENERGY STAR most efficient certification requirements;
- $600 for other qualified energy property, including central air conditioners; electric panels and certain related equipment; natural gas, propane or oil water heaters; oil furnaces; water boilers; and
- $2,000 for heat pump and heat pump water heaters; biomass stoves and boilers. This category of improvement is not limited by the $1,200 annual limit on total credits.
For eligible home improvements using products placed in service after 2024, no credit will be allowed unless the manufacturer of any purchased item creates a product identification number for the product and the taxpayer claiming the credit includes this number on his or her return for that tax year. Be sure to use only approved products.
Residential Clean Energy Credit
The Residential Energy-Efficient Property Credit, now called the Residential Clean Energy Credit, was previously scheduled to expire at the end of 2023 but is extended through 2034.
The IRA also increased the credit amount, with a phaseout of the applicable percentage. The amount of the credit is 30 percent for 2023-2032, 26 percent for 2033 and 22 percent for 2034.
The credit no longer applies to biomass furnaces and water heaters, as they are now covered under the Energy-Efficient Home Improvement Credit. Starting in 2023, however, the new credit will apply to battery storage technology with a capacity of at least three-kilowatt hours.
Unlike other provisions of the new law, these incentives do not have to wait months for the IRS to enact new rules or create new regulations. These are an extension and expansion of existing credits, and you can implement them immediately.
If you have any questions about the Inflation Reduction Act or the clean-energy tax incentives, please contact any of the professionals at Dannible & McKee, LLP. Visit dmcpas.com to learn more.