765 / What is the Residential Clean Energy Credit that may be taken against the tax?

The Inflation Reduction Act also renamed the existing residential energy efficient property credit the “Residential Clean Energy Credit.” The new law expanded the parameters of the credit and extended it through 2034. See Q .

An individual taxpayer may claim as a credit an amount equal to the sum of 30 percent of the following expenditures made by the taxpayer during the taxable year: (1) “qualified solar electric property” (see below); (2) “qualified solar water heating property” (see below); (3) “qualified fuel cell property” (see below); (4) qualified small wind energy property (see below); and (5) qualified geothermal heat pump property (see below).¹ Solar water heating property must be certified in order for the credit to be claimed.² The Protecting Americans from Tax Hikes Act of 2015 (PATH) modified the applicable percentage used to determine the amount of the credit for tax years after 2019. In 2020, the applicable percentage was reduced to 26 percent, and was scheduled to decrease to 23 percent by 2023. The Inflation Reduction Act modified these percentage limits so that the credit amount increases to 30 percent from 2022 to 2032. It then decreases to 26 percent for 2033 and 22 percent for 2034. The credit is set to expire after 2034.

“Qualified solar water heating property expenditure” means an expenditure for property to heat water for use in a dwelling unit located in the United States and used as a residence by the taxpayer if at least half of the energy used by such property for such purpose is derived from the sun. The term “qualified solar electric property expenditure” means an expenditure for property which uses solar energy to generate electricity for use in a dwelling unit located in the United States and used as a residence by the taxpayer. “Qualified fuel cell property expenditure” means an expenditure for qualified fuel cell property (as defined in IRC Section 48(c)(1)) installed on or in connection with a dwelling unit located in the United States and used as a principal residence by the taxpayer. “Qualified small wind energy property expenditure” means an expenditure for property which uses a wind turbine to generate electricity for use in connection with a dwelling unit located in the United States and used as a residence by the taxpayer. “Qualified geothermal heat pump property expenditure” means an expenditure for qualified geothermal heat pump property installed on or in connection with a dwelling unit located in the United States and used as a residence by the taxpayer.³

A special rule provides that expenditures allocable to a swimming pool, hot tub, or any other energy storage medium that has a function other than the function of storage cannot be taken into account for these purposes.⁴

The maximum credit allowed for any taxable years before 2009 cannot exceed $2,000 with respect to qualified solar water heating property expenditures, $500 with respect to each half kilowatt of capacity of qualified fuel cell property (as defined in section 48(c)(1)) for which qualified fuel cell property expenditures are made, $500 with respect to each half kilowatt of capacity (not to exceed $4,000) of wind turbines for which qualified small wind energy property expenditures are made, and $2,000 with respect to any qualified geothermal heat pump property expenditures.⁵ For tax years starting in 2009, the only remaining limit is the $500 limit for each half-kilowatt of capacity of fuel cell plants. The unused portion of the credit can be carried forward to the succeeding taxable year.⁶

The credit is generally available for property placed in service after December 31, 2005 and before January 1, 2024.⁷ The reduced rates prescribed by PATH apply to property placed into service after 2016 under the Bipartisan Budget Act of 2018.

Under the Inflation Reduction Act of 2022, the credit will no longer be allowed for biomass furnaces or water heaters. It will be expanded to include battery storage technology that has a capacity of not less than three kilowatt hours.

.IRC § 25D(a).

2.IRC § 25D(b)(2).

3.IRC § 25D(d).

4.IRC § 25D(e)(3).

5.IRC § 25D(b).

6.See IRC § 25D(c).

7.See § 1333, Energy Policy Act of 2005; IRC § 25D(g).