SECTION 3. QUESTIONS AND

ANSWERS RELATED TO BOTH § 25C (NONBUSINESS ENERGY PROPERTY) AND § 25D (RESIDENTIAL ENERGY EFFICIENT PROPERTY)

Q–1: Are the credits refundable or nonrefundable?

A–1: Both the § 25C credit and the § 25D credit are nonrefundable personal tax credits. A taxpayer claiming a nonrefundable credit can only use it to decrease or eliminate a tax liability. A taxpayer will not receive a tax refund for any amount that exceeds the taxpayer’s tax liability for the year.

Q–2: Is a taxpayer who is subject to the alternative minimum tax (AMT) eligible to claim the credits?

A–2: Yes. A taxpayer who is subject to the AMT is eligible to claim both the § 25C credit and the § 25D credit and may offset the AMT with those credits.

Q–3: May a taxpayer carry forward unused credits to another tax year?

A–3: A taxpayer may not carry forward the § 25C credit. Thus, if a taxpayer cannot claim all or a portion of the credit in the year in which the related expenditure is treated as made, the unused amount of the credit will expire. However, a taxpayer may carry the § 25D credit forward to future tax years pursuant to § 25D(c).

Q–4: Can a taxpayer claim the credits for expenditures incurred for a newly constructed home?

A–4: A taxpayer can claim the § 25C credit only for qualifying expenditures incurred for an existing home or for an addition or renovation to an existing home, and not for a newly constructed home. In contrast, a taxpayer can claim the § 25D credit for qualifying expenditures incurred for either an existing home or a newly constructed home.

Q–5: May a taxpayer claim the credits in the year of purchase if installation of

1For property placed in service in taxable years beginning in 2009 and 2010, § 25C allowed taxpayers to claim a maximum aggregate credit of $1,500. However, for years other than taxable years beginning in 2009 and 2010, § 25C limits the credit allowable to any taxpayer to the excess of $500 over the aggregate credits allowed to that taxpayer under § 25C for all prior taxable years ending after December 31, 2005 (including credits claimed in 2009 and 2010).

The maximum amount of credit allowed for any taxable year is $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. In addition, in the case of amounts paid or incurred for exterior windows, including skylights, § 25C limits the credit allowable to any taxpayer to the excess of $200 over the aggregate maximum amount of the credits allowed to that taxpayer for exterior windows under § 25C for all prior taxable years ending after December 31, 2005.

2Section 25C expired on December 31, 2011, but was retroactively extended by the 2012 Act.

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the qualifying property occurs in a later year?

A–5: No. A taxpayer may not claim the credits until the year the property is installed. The installation must be completed before the end of 2013 for the § 25C credit and before the end of 2016 for the § 25D credit.

In the case of an expenditure incurred in connection with the construction or reconstruction of a structure, a taxpayer cannot claim the credits until the year in which the taxpayer’s original use of the constructed or reconstructed structure begins, and the taxpayer’s original use of the constructed or reconstructed structure must begin before the end of 2013 for the § 25C credit and before the end of 2016 for the § 25D credit.

Q–6: Are the credits available for improvements made to a second home (for example, a vacation home or an investment property)?

A–6: Improvements made to a second home are not eligible for the credit under § 25C. Section 25C(c) and (d) require qualified energy efficiency improvements and residential energy property to be installed in or on a dwelling unit owned and used by the taxpayer as the taxpayer’s principal residence (within the meaning of § 121).

With respect to the credit under § 25D, fuel cell property credits are not available for second homes. Section 25D(d)(3) requires fuel cell property to be installed on or in connection with a dwelling unit that is used as the taxpayer’s principal residence (within the meaning of § 121). However, a taxpayer may claim a § 25D credit for other qualifying properties described in § 25D that are not fuel cell properties (solar electric property, solar water heating property, small wind energy property, and geothermal heat pump property) installed in or on a dwelling unit used as a second home or a vacation home by the taxpayer. But a taxpayer may not claim the § 25D credit for expenditures for improvements made to an investment property, such as rental property, that is not also used as a residence by the taxpayer.

Q–7: May a taxpayer claim a credit if the qualified property is also used for business purposes, such as in a dwelling

unit in which the taxpayer also conducts a business?

A–7: For both credits under §§ 25C and 25D, if a taxpayer uses property solely for business purposes, the property will not qualify for the credit. For a taxpayer who otherwise qualifies for the credits, but whose use of the qualified property for business purposes exceeds 20 percent, §§ 25C(e)(1) and 25D(e)(7) provide that the taxpayer, when calculating the amount of credit, may take into account only that portion of the expenditures for the property that are properly allocable to use for nonbusiness purposes. A taxpayer who qualifies for the credits and whose use of the qualified property for business purposes is not more than 20 percent may claim the full credit.

Q–8: May a taxpayer include labor costs when calculating the credits?

A–8: When calculating the § 25C credit, a taxpayer may include the labor costs for the onsite preparation, assembly, or original installation of residential energy property such as qualifying electric heat pumps, qualifying air conditioners, and qualifying biomass stoves. In contrast, a taxpayer may not include the labor costs for qualified energy efficient building envelope components including a qualifying insulation material or system, exterior window, skylight, exterior door, or roof. Thus, for an energy efficient building envelope component for which a taxpayer pays a fixed price, the taxpayer must make a reasonable allocation between the qualifying cost of the property and the nonqualifying labor cost of the installation. When calculating the § 25D credit, a taxpayer may include the expenditures for labor costs properly allocable to the onsite preparation, assembly, or original installation of the qualified property and for piping or wiring to interconnect the qualifying property to the home.

Q–9: May a taxpayer include sales tax when calculating the amount of expenditures eligible for the credits?

A–9: Generally, yes. Because the sales tax on a qualifying property is part of the amount paid or incurred, a taxpayer may include the amount of sales tax when calculating both the § 25C credit and the § 25D credit. However, because labor costs for qualified energy efficient building envelope components in § 25C are

ineligible for the credit as described in A–8, to the extent that sales tax is allocable to these labor costs, the sales tax is similarly ineligible for the credit.

Q–10: Are tenant-stockholders in a cooperative housing corporation and condominium owners eligible to claim the credits?

A–10: Yes. Sections 25C(e)(1) and 25D(e)(5) treat a tenant-stockholder (as defined in § 216) in a cooperative housing corporation (as defined in § 216) as making his or her proportionate share (as defined in § 216(b)(3)) of any expenditures of such corporation. Similarly, §§ 25C(e)(1) and 25D(e)(6) treat a member of a condominium management association as having made the individual’s proportionate share of any expenditures of such association.

Q–11: If a government or a public utility provides a subsidy (for example, an incentive, grant, or rebate) to a taxpayer to purchase or install a qualifying property under § 25C or § 25D, is the taxpayer required to reduce the cost basis of the property by the amount of the subsidy received, thereby reducing the amount of the qualified expenditure for which a credit may be claimed?

A–11: The answer depends on the facts that apply to each taxpayer.

.01 Public Utility . Under § 136, if a public utility provides (directly or indirectly) a subsidy to a customer for the purchase or installation of any energy conservation measure, the customer does not include in his or her gross income the value of the subsidy. As a result, the taxpayer may not claim a credit for the amount of the subsidy that is excluded from the taxpayer’s gross income. This rule applies whether a third-party contractor receives a subsidy on behalf of the taxpayer or the taxpayer receives the subsidy directly. Not all payments from a public utility fall within the provisions of § 136.

.02 Rebates . Rebates generally represent a reduction in the purchase price or cost of property, and the taxpayer must exclude the amount of the rebate from the amount of the qualified expenditure on which the taxpayer calculates the tax credit. In general, in order for a receipt of funds to be considered a nontaxable rebate, the rebate must be based on or related to the cost of the property; the rebate

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window expenditures and claimed no § 25C credit in 2009, 2010, 2011, and 2012 is eligible to claim up to $350 as a § 25C credit for 2013 (of which no more than $200 may be attributable to expenditures on windows).

Q–18: Is a sealant such as caulk or weather stripping an insulation material or system eligible for the credit?

A–18: Section 25C(c) defines a building envelope component as any insulation material or system that is specifically and primarily designed to reduce the heat loss or gain of a dwelling unit when installed in or on such dwelling unit and meets the prescriptive criteria for such material or system established by the 2009 International Energy Conservation Code (IECC), including supplements, as in effect on February 17, 2009.

Section 402.4 of the 2009 IECC addresses components to reduce air leakage. Section 402.4.1 provides, in part, that the building thermal envelope must be durably sealed to limit infiltration. The following must be caulked, gasketed, weatherstripped or otherwise sealed with an air barrier material, suitable film, or solid material:

1. All joints, seams, and penetrations.
2. Site-built windows, doors and skylights.
3. Openings between window and door assemblies and their respective jambs and framing.
4. Utility penetrations.
5. Dropped ceilings or chases adjacent to the thermal envelope.
6. Knee walls.
7. Walls and ceilings separating a garage from conditioned spaces.
8. Behind tubs and showers on exterior walls.
9. Common walls between dwelling units.
10. Attic access openings.
11. Rim joist junction.
12. Other sources of infiltration. ³

Thus, if a taxpayer uses an air barrier material, suitable film, or solid material such as caulk or weatherstripping to seal the areas of a principal residence listed above, the taxpayer may claim the § 25C credit with respect to amounts paid for

must be received from someone having a reasonable nexus to the sale of the property, for example, the manufacturer, distributor, or seller/installer; and the rebate must not represent payment or compensation for services.

.03 State Energy-Efficiency Incentives . A state may provide energy-efficiency incentives to encourage taxpayers to purchase qualifying property under § 25C or § 25D. Section 136 does not address these incentives.

Generally, a taxpayer is not required to reduce the purchase price or cost of property acquired with a governmental energyefficiency incentive that is not a rebate. Many states label their energy-efficiency incentives as rebates, but these incentives may not in fact constitute rebates or purchase-price adjustments for federal income tax purposes.

However, for qualifying property under § 25C placed in service after 2010 that is financed in whole or in part by subsidized energy financing, the amount of expenditures eligible for the § 25C credit does not include any expenditures that are made from subsidized energy financing. Subsidized energy financing means financing provided under a federal, state, or local program a principal purpose of which is to provide subsidized financing for projects designed to conserve or produce energy.

Q–12: If a taxpayer is eligible to claim a state tax credit related to the purchase of qualifying property under § 25C or § 25D, is the taxpayer required to reduce the cost basis of the property by the amount of the state tax credit claimed, thereby reducing the amount of the qualified expenditure for which the § 25C or § 25D credit may be claimed?

A–12: No. The taxpayer does not reduce the amount of the qualified expenditure by the amount of the state tax credit claimed in calculating the credits.

Q–13: If a taxpayer finances the purchase of a qualifying property under § 25C or § 25D through the seller of the property, may the taxpayer calculate the amount of the credit based on the full cost of the property if the taxpayer is contractually obligated to pay that entire amount?

A–13: Yes. If the taxpayer is contractually obligated to pay the full cost of the qualifying property, the taxpayer may claim a tax credit based on that amount.

Q–14: May a taxpayer claim a credit for payments of interest owed through financing or for expenses such as an origination fee or an extended warranty?

A–14: No. Interest expense is not part of the expenditure for qualifying property under § 25C or § 25D. Other miscellaneous costs such as an origination fee or an amount paid for an extended warranty are also ineligible for the credits.

Q–15: May a taxpayer claim a credit for property that the taxpayer leases rather than purchases?

A–15: No. A taxpayer must purchase the qualifying property to claim the credits under §§ 25C and 25D.

Q–16: May a taxpayer claim the credits when the taxpayer does not have a manufacturer’s certification that the property is eligible for the credit?

A–16: Yes. A taxpayer may qualify for the credits under §§ 25C and 25D without a manufacturer’s certification statement if the taxpayer can show that the property meets the required efficiency standards. A taxpayer should retain documentation sufficient to establish the entitlement to, and amount of, any credit.