SECTION 2. BACKGROUND

.01 Energy Policy Act of 2005 . Section 1333 of the Energy Policy Act of 2005 (EPACT), Pub. L. No. 109–58, 119 Stat. 594 (2005), added § 25C to the Internal Revenue Code. Section 25C, as added by EPACT, provided a credit for amounts paid or incurred for qualified energy efficiency improvements installed during a taxable year and for residential energy property expenditures paid or incurred by a taxpayer during the taxable year. Section 25C, as added by EPACT and as modified by EIEA and ARRTA, defines qualified energy efficiency improvements as building envelope components that satisfy specified efficiency standards (eligible building envelope components) and the requirements listed in section 2.05(1) of this notice and defines residential energy property expenditures as expenditures for energy property that satisfies specified energy standards (qualified energy property) and the requirements listed in section 2.05(1) of this notice. The credit was available for property placed in service after December 31, 2005, and before January 1, 2008. Notice 2006–26, 2006–1 C.B. 622, as clarified by Notice 2006–53, 2006–1 C.B. 1180, provides guidance on the credit under § 25C for property placed in service after December 31, 2005, and before January 1, 2008.

.02 EIEA . Section 302 of EIEA reinstated and modified the § 25C credit for property placed in service during 2009. Neither EPACT nor EIEA provided any credit under § 25C for property placed in service during 2008.

Section 25C, as amended by EIEA, provided a credit against tax for the taxable year in an amount equal to the sum of—

(1) Ten percent of the expenditures paid or incurred by the taxpayer for qualified energy efficiency improvements installed during the taxable year, and

(2) The amount of expenditures for residential energy property.

The maximum amount of credit allowed was $50 for any advanced main air circulating fan; $150 for any qualified

natural gas, propane, or oil furnace or hot water boiler; and $300 for any item of energy-efficient building property. The maximum amount of the credit allowable to a taxpayer under § 25C for all taxable years was $500 ($200 in the case of amounts paid or incurred for exterior windows (including storm windows and skylights)).

.03 EIEA Energy Efficiency Standards . Section 25C, as amended by EIEA, and Notice 2006–26, as clarified by Notice 2006–53, allowed a credit with respect to the following property:

(1) Eligible Building Envelope Compo- nents .

(a) An insulation material or system (including any vapor retarder or seal to limit infiltration) that—

(i) Is specifically and primarily designed (within the meaning of section 4.03 of this notice) to reduce heat loss or gain of a dwelling unit when installed in or on the dwelling unit; and

(ii) May be taken into account in determining whether the building thermal envelope requirements established by the International Energy Conservation Code (IECC) are satisfied.

(b) An exterior window, skylight, or door (other than a storm window or storm door) that meets or exceeds the prescriptive criteria established by the IECC for the climate zone in which the window, skylight, or door is installed.

(c) A storm window that, in combination with the exterior window over which it is installed, meets or exceeds the prescriptive criteria established by the IECC for the climate zone in which such storm window is installed.

(d) A storm door that, in combination with a wood door that is assigned a default U factor by the IECC, does not exceed the default U factor requirement assigned to such combination by the IECC.

(e) Any metal roof that— (i) has appropriate pigmented coatings that are specifically and primarily designed to reduce the heat gain of a dwelling unit when installed on the dwelling unit, and

(ii) meets or exceeds either of the applicable Energy Star program requirements. The applicable Energy Star program requirements for this purpose are those in effect at the time the expenditures for the roof are actually paid or incurred and those

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(other than a storm window or storm door) that—

(a) Has a U factor and Solar Heat Gain Coefficient (SHGC) of 0.30 or below; and

(b) Meets the prescriptive criteria for such component established by the IECC.

(3) Storm Window . A storm window that, in combination with the exterior window over which it is installed—

(a) Has a U factor and SHGC of 0.30 or below; and

(b) Meets the prescriptive criteria for such component established by the IECC.

(4) Storm Door . A storm door that, in combination with the exterior door over which it is installed—

(a) Has a U factor and SHGC of 0.30 or below; and

(b) Meets the prescriptive criteria for such component established by the IECC.

(5) Metal Roof . Any metal roof described in section 2.03(1)(e) of this notice (ARRTA did not change the efficiency standard for a metal roof).

(6) Asphalt Roof . Any asphalt roof described in section 2.03(1)(f) of this notice (ARRTA did not change the efficiency standard for an asphalt roof).

.02 Installation Costs . With respect to eligible building envelope components, the credit is allowed only for amounts paid or incurred to purchase the components. The credit is not allowed for amounts paid or incurred for the onsite preparation, assembly, or original installation of the components.

.03 Specifically and Primarily De- signed . A component is not specifically and primarily designed to reduce heat loss or gain of a dwelling unit if it provides structural support or a finished surface, as in the case of drywall or siding. In addition, a component is not specifically and primarily designed to reduce heat loss or gain of a dwelling unit if its principal purpose is to serve any function unrelated to the reduction of heat loss or gain. For purposes of the preceding sentence, the principal purpose of a component is to serve functions unrelated to the reduction of heat loss or gain if—

(1) Production costs attributable to features other than those that reduce heat loss or gain exceed production costs attributable to features that reduce heat loss or gain; or

(2) The facts and circumstances otherwise establish that the component’s prin

that is placed in service in 2009 and 2010. Section 25C, as amended by ARRTA—

(1) Provides, with respect to property placed in service in 2009 and 2010, a credit against the tax imposed for the taxable year in an amount equal to 30 percent of the sum of—

(a) The amount paid or incurred by the taxpayer during the taxable year for qualified energy efficiency improvements, and

(b) The amount paid or incurred by the taxpayer during the taxable year for residential energy property expenditures;

(2) Limits the cumulative total of credits allowed for taxable years beginning in 2009 and 2010 to $1,500 per taxpayer (credits allowed in, and unused credit limitations from, prior years are disregarded in applying this limitation); and

(3) Applies new energy efficiency standards for certain types of property (see sections 4.01 and 5.01 of this notice).

.05 General Provisions . Under all three of the acts, EPACT, EIEA, and ARRTA, the following provisions apply:

(1) Requirements to Claim the Credit . A taxpayer may claim a credit under § 25C with respect to amounts paid or incurred for an item of property only if each of the following requirements is satisfied:

(a) The item is installed in or on a dwelling unit located in the United States and, at the time of installation, the dwelling unit is owned and used by the taxpayer as the taxpayer’s principal residence (within the meaning of § 121). Thus, the credit is only available for existing homes. See § 45L for the credit applicable to new homes.

(b) The original use of the item commences with the taxpayer.

(c) In the case of a building envelope component described in section 2.03(1) or 4.01 of this notice, the component reasonably can be expected to remain in use for at least five years. For this purpose, a component will be treated as reasonably expected to remain in use for at least five years if the manufacturer offers, at no extra charge, at least a two-year warranty providing for repair or replacement of the component in the event of a defect in materials or workmanship. If the manufacturer does not offer such a warranty, all relevant facts and circumstances are taken into account in determining whether the component reasonably can be expected to remain in use for at least five years.

(2) Time of Expenditure . The credit is allowed for amounts paid or incurred by the taxpayer during the taxable year. Section 25C(e)(1) incorporates § 25D(e)(8), relating to the time expenditures are treated as made. Accordingly, except as provided in section 2.03(1)(e) and (f) of this notice, expenditures will be treated as made for purposes of § 25C when the original installation of the property is complete or, in the case of reconstruction, when the original use of the reconstructed property begins.