SECTION 2. BACKGROUND

.01 Energy Efficient Home Improvement Credit

Section 25C was originally enacted by § 1333(a) of the Energy Policy Act of 2005, Pub. L. 109-58, 119 Stat. 594, 1026 (August 8, 2005), to provide a tax credit for the purchase and installation of certain energy efficient improvements in taxpayers’ principal residences. Congress has amended § 25C several times since its original enactment, most recently under § 13301 of the IRA, which renamed this provision the “energy efficient home improvement credit” and provided that § 25C, as amended by the IRA, applies to property placed in service prior to January 1, 2033. Section 13301(b) and (f) of the IRA amended § 25C(a) to allow a credit amount equal to 30 percent of the sum of the amounts that individual taxpayers pay or incur during a taxable year for (1) qualified energy efficiency improvements installed during the year, (2) residential energy property expenditures, and (3) home energy audits.

As amended by § 13301(c) of the IRA, the § 25C credit is generally limited to an annual cap of $1,200. Within this $1,200 limitation, § 25C(b) sets forth further annual caps for certain categories of improvements. The caps and categories of improvements under these limitations are as follows: $600 for any item of qualified energy property, as defined in § 25C(d) (2); $600 for exterior windows and skylights; $250 for any single exterior door and $500 in the aggregate for all exterior doors; and $150 for home energy audits. Section 25C(b) also provides that residential energy property expenditures for heat pumps, heat pump water heaters, biomass stoves, and biomass boilers are not subject to the annual cap of $1,200 or to the $600 limitation for any item of qualified energy property. Instead, residential energy property expenditures for these items are subject to a separate aggregate annual limitation of $2,000. Section 25C(d) provides that the term “residential energy property expenditures” includes expenditures for labor costs properly allocable to the onsite

preparation, assembly, or original installation of the property.

.02 Credit for Home Energy Audit Expenditures

Section 13301(f) of the IRA amended § 25C to expand the types of expenditures eligible for the § 25C credit to include expenditures for home energy audits. Section 25C(e) defines the term “home energy audit” as an inspection and written report with respect to a dwelling unit located in the United States and owned or used by the taxpayer as the taxpayer’s principal residence (within the meaning of § 121). The audit must (1) identify the most significant and cost-effective energy efficiency improvements with respect to such dwelling unit, including an estimate of the energy and cost savings with respect to each such improvement, and (2) be conducted and prepared by a home energy auditor that meets the certification or other requirements specified by the Secretary of the Treasury or her delegate (Secretary) in regulations or other guidance. The IRA also imposed two limitations on this credit. First, as described above, § 25C(b)(6)(A) limits the credit allowed for amounts paid or incurred by the taxpayer during the taxable year for home energy audits up to $150. Under this limit, for example, a taxpayer that pays $1000 for a home energy audit during the taxable year may only claim a $150 credit for such taxable year for this expenditure, and not the full 30 percent of the amount of the expenditure, even if the taxpayer does not have any other expenditures eligible for the § 25C credit during the taxable year. Second, § 25C(b)(6)(B) imposes a substantiation requirement, requiring taxpayers claiming the credit to include with their tax returns “such information or documentation as the Secretary may require”.

In Notice 2022-48, 2022-43 I.R.B. 305, the Treasury Department and the IRS requested comments on various questions arising from the IRA’s energy efficiency provisions. Among other questions, the notice requested comments on what certification or other requirements the Treasury Department and the IRS should require for home energy auditors that conduct the inspection and provide the written report that constitutes a “home energy audit” that qualifies for the § 25C credit.

The Treasury Department and the IRS published a Fact Sheet (FS-2022-40) on December 22, 2022, addressing “frequently asked questions about energy efficient home improvements and residential clean energy property credits.” This Fact Sheet provides that a qualifying home energy audit “must include an inspection of a dwelling, including condominiums and certain manufactured homes, located in the United States that is owned or used by the taxpayer as the taxpayer’s principal residence. The home energy auditor must provide a written report (to the taxpayer) that identifies the most significant and cost-effective energy efficiency improvements for that dwelling, including an estimate of the energy and cost savings for each such improvement. The auditor must meet the certification or other requirements specified by the Department of the Treasury and the Internal Revenue Service in forthcoming guidance.” The Fact Sheet also clarifies that the § 25C credit with respect to home energy audits may be claimed by a taxpayer renting a home as their principal residence provided such home is located in the United States.