Tech Needed to Simplify Energy Credits for Individuals

Special tax rules tend to be complex because they are "special" in that they are not part of the normal tax system and are not intended for all taxpayers and all activities. Drafting legislation and regulations to be sure the credits are used as intended, is challenging. We are seeing this with most of the energy credits added or modified by the Inflation Reducation Act of 2022. The IRS has to define many challenging terms that were not completely spelled out in the legislation, such as the value of critical minerals, battery components, and more.

I have written about some of this before and this blog post of 8/21/22 includes track changs for several of the revised credits such as the two home energy credits and the clean vehicle credit.

For the clean vehicle credit at IRC §30D, the "qualified manufacturer" has to verify most of the difficult provisions to know if the vehicle is "clean" and if it qualifies the buyer for the critical minerals credit of $3,750 and/or the battery components credit of $3,750. The provisions are complex, but some of that complexity is on the manufacturer rather than the buyer (and lots of complexity on the IRS).

For the two revised residential energy credits, the complexity falls on the homeowner (and for some elements of the credits, the tenant if they are incurring the costs). These rules are complex and are with us for the next 10 years to it is worth finding ways to simplify the process for individuals to know if they have purchased the proper property (meets the specified Energy Star or other standard). In addition, for the IRC §25C Energy Efficient Home Improvement Credit, there are different credit limits on doors versus windows versus biomass stoves, etc. 

Here is one suggestion for making it simpler for indviduals to know if they can qualify for the §25C credit which might also better encourage them to make home improvements that will reduce energy usage. 

Software, algorithms and databases can be created where the individual can use in at least two ways. First, the individual can enter a product code (often on many products) or description (name of product and manufacturer) into a website and learn if it qualifies for the §25C or 25D code. The website would need to have the Energy Star and similar information required per these provisions. And the individual would need to enter data about whether they own or rent their home and whether it is their principal residence (the §25C credit covers three broad categories of property and they all vary on how that information is relevant).

The second way to use the well-designed website is to input what they want to do. For example, they want to install energy efficient windows (and how many and the cost). The website should then provide a list of what windows qualify and how they can maximize the credit over multiple years since the maximum credit for windows, for example, is $600 total for the year (at a 30% rate that is a maximum door window cost of $2,000 per year).

The website could also provide a list of reminders such as the need to reduce basis of property by the credit amount, whether a carryforward is allowed, and what recordkeeping to keep and for how long.

Finally, these website should allow the individual to take the output and in a digital format, let it be connected to their tax prep software to produce the required form.

The technology exists to make this happen. It will take time to produce such websites for individuals du to the complexity of the provisions and the variety of items that may qualify for the credit.

There is some helpful information on the IRS website about the §25C credit (and others), but it is not everything and likely won't help individuals understand how to ensure they qualify for the credit and how to maximize it over multiple years.

What do you think?

Residential Energy Credit Observations & Cautions

First, a policy query: How long should tax incentives be in the law. For example, with the Inflation Reduction Act of 2022, Congress extended the residential energy credits of §25C and §25D through 2032 and 2034, respectively. The §25C credit was first added to the law in 1978 (as §44C by the Energy Tax Act of 1978, P.L. 95-618 (11/9/78)).

Section 25C (originally §44C and then §23) lasted through 1985 and lapsed until reinstated and revised in 2005 by the Energy Policy Act of 2005 (P.L.109-58 (8/8/05)), with §25D added, effective for 2006 and 2007. Subsequent legislation generally continued to extend these provisions (and sometimes modify them) for one to two years at a time.

So, a residential energy credit existed for 1977 through 1985 and for 2006 through 2032 (2034 for §25D). For more on the history, see Congressional Research Service (CRS), Residential Energy Tax Credits: Overview and Analysis, 4/9/18.

How long should these incentives be in the law? Shouldn't law changes have required new homes to be built with building envelope that is energy efficient and with solar panels? Should a time limit have been given for making older homes energy efficient? Perhaps. Are tax incentives the best way to go forever or should utility companies be incentivized to help customers make improvements?

These credits, particularly §25C, are a bit complex. For example, §25C covers three types of expenditures with details and qualifications for each category. Also, while subtle in the language, you have to read it carefully to know if the expenditure is only for a principal residence you own and use or if it is ok for it to be owned OR used (true for home energy audits), or just has to be a residence (principal or vacation) owned or used (if only has to be used, tenant may claim the credit).

Homeowners should be cautious in using these credits because there are annual limits on, for example, how much you can claim for qualified doors and windows. Spreading the improvements out over a few years can maximize the credit. 

Also, there are both ill-informed and unscrupulous sellers and installers who might mislead taxpayers as to how much credit they will get. Some will encourage those with equity in their home to borrow to pay for the energy efficient items and perhaps a lot more that doesn't generate a credit and might not even be needed. Be cautious and encourage your clients and older family members to be cautious.

For more on these credits, see my 8/21/22 post that also has links to the track changes versions of these credits. These documents also have links to IRS information on the current versions of these credits.

What do you think?