What’s in the Inflation Reduction Act for HVAC, Home Performance, and Solar Contractors?
The Inflation Reduction Act has been signed into law this week! With $370 billion allotted to initiatives aimed at improving the environment, it is the biggest investment our government has ever made to fight climate change, and is projected to reduce US greenhouse gas emissions 40% by 2030 (here’s a closer read on where that figure came from and how accurate it might be).
There’s a lot to celebrate in this important piece of legislation, and if you’re an HVAC, solar, or home performance contractor, the Inflation Reduction Act (IRA) offers a great chance to rethink the way you market and sell your services to customers. We’ll be talking much more about the IRA in the weeks to come, but to start, we’ve saved you from reading the new law in its entirety by gathering some key takeaways from this legislation.
Tax Credits & Deductions
In the immediate future, the most important aspects of the Inflation Reduction Act are changes and extensions to several industry-relevant tax credits and deductions.
25C Tax Credit - Energy Efficiency Home Improvement (The Nonbusiness Energy Property Tax Credit)
What It Does: Offers homeowners a tax credit for energy efficiency upgrades.
Key Takeaways:
- Credit revived and made retroactive for 2022 (at original 10%)
- Starting in 2023, credit increases to 30% through 2032
- Lifetime cap of $500 will be replaced by:
- A $1,200 total annual limit on the following services and home improvements (limits for individual measures listed below; cost of materials and installation covered except where noted)
- Insulation and air sealing ($1,200 max, onsite labor costs not covered)
- Energy audits ($150 max)
- Energy-efficient HVAC systems including furnaces, boilers, and central AC ($600 max)
- High-efficiency water heaters ($600 max)
- Electrical panel upgrades ($600 max)
- Energy-efficient exterior windows and doors ($500 max for doors, $600 max for windows, onsite labor costs not covered)
- A separate $2,000 annual limit for heat pumps and heat pump hot water heaters
- Roofs are no longer eligible
- Unused 25C tax credit balances cannot be rolled forward into future years
179D Tax Deduction - Energy Efficient Commercial Buildings Deduction
What It Does: Offers a deduction for commercial buildings that demonstrate a calculated reduction in energy usage.
Key Takeaways:
-
Deductions now range from $0.50/sq ft for calculated energy cost savings of 25% to $1.00/sq ft for 50% savings, with $0.02 added for each additional percentage point of energy savings
-
If companies meet prevailing wage and apprentice program requirements, deductions start at $2.50/sq ft (25% savings) and increase to max of $5.00/sq ft (50% savings), with $0.10 added for each additional percentage point of energy savings
-
Modeled energy savings must be achieved via:
-
Heating, cooling, ventilation, and hot water systems
-
Interior lighting
-
Building envelope
-
Eligible buildings now include not-for-profit organizations, churches, not-for-profit schools and universities, and more
-
Deduction can now be claimed every three-four years if changes are made to the building (previously it was a one-time deduction per building)
45L Tax Credit - Energy Efficient Home and Multifamily Credit (New Energy Efficient Home Credit)
What It Does: Offers builders a tax credit for new energy-efficient building projects.
Key Takeaways:
-
Credit revived and made retroactive for 2022 (at original $2,000)
-
Starting in 2023, credit increases to $5,000 for single-family, multifamily, and manufactured homes through 2032
-
Higher energy-efficiency standards for builders to meet
Federal Solar Tax Credit (Investment Tax Credit)
What It Does: Offers tax credit for residential and commercial solar PV installation.
Key Takeaways:
-
Increases 2022 credit to 30% and makes it retroactive for all installations this year
-
Credit extended at 30% through 2032; will step down in 2033 and be eliminated for residential in 2035
-
Starting in 2023, stand-alone battery storage qualifies for credit
Rebates & Training Grants
The other major component of the IRA pertinent to our industries is $9 billion set aside for the creation of two major rebate programs and contractor training.
$4.3 Billion for HOMES (Home Owner Managing Energy Savings) Rebate Program
-
Rebates up to $4,000 for home energy efficiency retrofits with modeled energy savings of 35% or more (or $2,000 for 20-34% energy savings)
-
Services can include insulation, air sealing, heat pump/HVAC upgrades, and more
-
Additional rebates up to $8,000 available for low and moderate-income homeowners
-
Rebates cannot be combined with other federal grants or rebates
$200 Million for State-Based Home Energy Efficiency Contractor Training Grants
-
Training for contractors involved in installation of home energy efficiency and electrification improvements
-
Funding through September 2031
$4.5 Billion for High-Efficiency Electric Home Rebate Program
-
Rebates for low and moderate-income homeowners for electric system/appliance purchases and energy efficiency upgrades
-
Maximum rebate of $14,000; individual rebates are as follows:
-
Heat pump water heaters: $1,750
-
Heat pump HVAC systems: $8,000
-
Electric stoves: $840
-
Heat pump clothes dryers: $840
-
Electrical panel upgrades: $4,000
-
Insulation, air sealing, and ventilation: $1,600
-
Electric wiring: $2,500
-
Rebates cannot be combined with other federal grants or rebates
What’s Next?: First Steps for Contractors in 2022
Rebates and training grants will be valuable tools for contractors looking to improve and promote their energy efficiency and home electrification services. But it’s currently unclear when they’ll actually become available—there are many implementation questions that need to be answered first. Until then, keep them in your back pocket, as they’ll be essential in the (we hope) not-so-distant future.
Closer on the horizon are the tax credits, particularly the 25C credit for energy efficient home improvements that increases to 30% in 2023. Current media coverage and high public awareness of the Inflation Reduction Act present a golden opportunity for you to start prepping now so that you can push these incentives on your website and in your marketing efforts as soon as they go into effect.
How? Register for our next webinar and follow the Energy Circle newsletter as we take a deeper look into this new legislation and what contractors in our industry should be doing about it in the weeks and months to come.