Homeowners have long been rewarded with favorable tax treatment for making energy-efficient improvements. The Inflation Reduction Act, enacted in 2022, expands the tax credit for qualified energy-efficient improvements to help subsidize home energy audits, which can result in even more savings in your utility bills. Recent IRS guidance sheds some light on the credit.

Overview

The Inflation Reduction Act amended the Section 25C(a) credit as of January 1, 2023, to include home energy audits. On average, a home energy audit costs $200 to $600, according to HomeGuide, an online marketplace for cost guides and referrals of local professionals for a variety of home-related tasks. Audit prices vary depending on home size, location and tests required.

The credit amount equals 30% of the audit’s cost, up to a maximum of $150. To qualify, the property generally must be your primary residence. It isn’t available if you’re a landlord or other property owner who doesn’t live in the home. In addition, the home must be in the United States. It also must be an existing home, not a new construction.

You can’t claim the credit for property used solely for business purposes. However, if your business use is 20% or less of the total use, you can claim the full credit amount. If your business use exceeds 20%, the credit amount is based on the share of the audit cost allocable to nonbusiness use.

What’s a Home Energy Audit?

A home energy audit is a comprehensive evaluation of the house’s energy performance conducted by trained experts, according to the U.S. Department of Energy (DOE). An auditor inspects the home, collects and analyzes data, and summarizes the findings in a written report. An audit is generally considered the first step toward improving a home’s energy performance because it provides a prioritized punch list of the most significant, cost-effective improvements the owner can make.

The DOE emphasizes the importance of implementing energy upgrades in the proper order because the optimal performance of some building technologies depends on the quality of other aspects of the home. For example, a heat pump won’t achieve its maximum performance if the air it treats escapes through leaky doors, windows or walls. Notably, an audit may determine that the most invasive and pricey upgrades (for example, full window replacements) aren’t necessary to substantially improve a home’s energy efficiency.

Home Energy Audit Credit Requirements

For purposes of the tax credit, a home energy audit is defined as an inspection and written report that satisfies all the following requirements:

  • The audit identifies the most significant and cost-effective energy efficiency improvements, including estimates of the energy and cost savings associated with each,
  • The inspection is conducted by a “qualified home energy auditor” currently certified by a qualified certification program or under the supervision of such an auditor,
  • A qualified home energy auditor prepares and signs the written report, and
  • The audit is consistent with the most recent DOE-led and industry-validated Jobs Task Analysis.

Note: The IRS has established a transition rule for home energy audits conducted in 2023. Taxpayers can claim the credit for these audits even if the auditor wasn’t a qualified home energy auditor at the time of the audit.

Reporting Requirements

The auditor’s written report must be consistent with industry best standards and include:

  • The qualified home energy auditor’s name and relevant employer identification number or other type of taxpayer identification number,
  • An attestation that the auditor is properly certified, and
  • The name of the qualified certification program.

To substantiate your home energy audit credit, you’ll need to keep the written report and comply with the instructions for Form 5695, “Residential Energy Credits.”

Additional Tax Credit Opportunities

As the first step in improving a home’s energy efficiency, a home energy audit can serve as the gateway to other tax credits. Sec. 25C(a) also offers a credit for 30% of the amounts paid or incurred for qualified energy efficiency improvements and residential energy property expenses, subject to certain limits.

For qualifying property placed in service on or after January 1, 2023, and before January 1, 2033, the maximum credit each year is:

  • $1,200 for energy property costs and certain energy-efficient home improvements (excluding labor costs), with limits on the credit for doors ($250 per door and $500 total) and windows and skylights ($600 total).
  • $2,000 for qualified heat pumps, biomass stoves or biomass boilers (including installation).

Qualified residential energy property is also eligible for a credit under Sec. 25C(a) of up to $600 per item (costs may include installation) for new:

  • Central air conditioners,
  • Natural gas, propane or oil water heaters, and
  • Natural gas, propane or oil furnaces and hot water boilers.

The Sec. 25C(a) credit has no lifetime dollar limit, so you can claim the maximum annual credit every year that you make eligible improvements through 2032. As a nonrefundable credit, though, the credit can’t exceed the amount you owe in taxes, and excess credit can’t be applied to future tax years.

That’s Not All

The Inflation Reduction Act offers several opportunities to cut your tax bill by making energy-efficient improvements to residential property, business property and vehicles. Contact us to determine what’s right for your situation.