Tom Talks Taxes - November 4, 2022
Tom Talks Taxes - November 4, 2022
All about the revised §25D residential clean energy credit
Before the Inflation Reduction Act, §25D provided a residential energy efficient property credit through tax year 2023 for:
Solar electric property,
Solar water heating property,
Fuel cell property,
Small wind energy property,
Geothermal heat pump property, and
Biomass fuel property.
The tax credit rates were 26% for tax year 2022, 22% for tax year 2023, and no credit available in tax year 2024 and beyond.
For property placed in service after December 31, 2022, revised §25D provides a residential clean energy credit through tax year 2034 for:
Solar electric property,
Solar water heating property,
Fuel cell property,
Small wind energy property,
Geothermal heat pump property, and
Battery storage.
The law changed the tax credit rates to 30% for tax years 2022 through 2032, 26% in tax year 2033, 22% in tax year 2034, and no credit available in tax year 2035 and beyond.
Two important notes about the changes to qualifying property:
Biomass fuel property will not be qualifying property starting in tax year 2023. A taxpayer planning to install biomass fuel property should place it in service before January 1, 2023 to receive the §25D credit.
Battery storage placed in service after December 31, 2022 qualifies for the §25D credit if it has a capacity of 3 kWh or more. Prior battery storage expenses could be eligible for the §25D credit as solar electric property if all the energy that charges the battery comes from the solar electric property. See PLR 201809003.
Except for the specific changes listed above, the revised §25D credit is the same as its prior version.
For solar electric property to qualify for the §25D credit, the taxpayer must install the property to generate electricity for use in the taxpayer’s home. If the system generates more than a minimal amount of excess electricity for sale, the §25D credit is only allowed for the amount related to the electricity generated for home use. The §48 credit may be available for the nonpersonal use of the property. See Notice 2013-70, A-27.
Costs eligible for the §25D credit include sales tax, labor costs properly allocable to the onsite preparation, assembly, or original installation of the qualified property, and piping or wiring to interconnect the qualifying property to the home. A taxpayer may have to reduce the creditable cost by certain utility or government subsidies if they are considered a non-taxable rebate. See Notice 2013-70, A-8, A-9, and A-11.
The §25D credit is available for any residence of the taxpayer, except for fuel cell property, which is only available for a taxpayer’s §121 primary residence. If solar panels not directly located on the taxpayer’s home use solar energy to generate electricity directly for the taxpayer’s home, the property qualifies for the credit. See Notice 2013-70, A-25.
The taxpayer must reduce the basis in their residence by the credit amount. Any gain attributed to the reduction may qualify for the §121 exclusion if the taxpayer installs the property on a primary residence. If it is not installed on a primary residence, any gain is likely long-term capital gain.
If there is business use of the residence (e.g., §280A home office), and the business use is 20% or less, then the qualifying expenses are not reduced by the business portion. If the business use of the residence exceeds 20%, only the amounts allocable to the nonbusiness portion qualify for the §25D credit. See Notice 2013-70, A-8. In addition, the business use portion of the improvement may be a depreciable asset.
Many states have additional tax credits to provide incentives to install residential clean energy generation. State tax credits do not reduce the creditable federal amount. See Notice 2013-70, A-12.
Example 1. Kyle placed a primary residence solar electric system in service on November 1, 2022. The system's total cost was $28,000 (including components and labor), and included battery storage exclusively charged by the solar electric system. The system will generate electricity to cover 85% of the home’s annual consumption.
Kyle has a sole proprietorship business, and 12% of his home is regularly and exclusively used in that business and qualifies as a §280A home office.
He will also receive a $1,000 nonrefundable Arizona tax credit on his 2022 Arizona tax return due to the installation of the solar electric property.
Kyle’s §25D credit amount is $8,400, which is 30% of $28,000. Neither the home office nor the state tax credit reduces the creditable expense.
Example 2. Same as above, except Kyle’s §280A home office is 22% of his primary residence.
Kyle’s §25D credit amount is $6,552, which is 30% of 78% of $28,000. Since Kyle’s business use of the home exceeds 20%, only the portion of the expense allocable to the nonbusiness portion qualifies for the §25D credit.
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