Energy Tax Credits at a Glance
For many taxpayers, the topic of energy tax credits can be confusing and overwhelming. With a vast array of credits and incentives available, it can be challenging to navigate the complex system and understand what credits are available. In this article, we will break down the basics of energy tax credits, including what they are, who qualifies, and what is available in terms of credits.
What are energy tax credits?
Energy tax credits are incentives offered by the government to individuals and businesses who make energy-efficient upgrades or use renewable energy sources. These credits can help offset the costs associated with incorporating energy-efficient technologies into your home or business. In addition, these tax credits can help reduce energy consumption, promote environmental sustainability, and contribute to the reduction of greenhouse gas emissions.
The Credits Explained
Residential Energy Credits
The Residential Energy Efficient Property (REEP) Credit is available for homeowners who make energy-efficient upgrades to their homes. The credit, which can be claimed for expenses incurred through December 31, 2021, can be worth up to 30% of the cost of the qualified property. This credit covers improvements such as solar panels, wind turbines, geothermal heat pumps, and fuel cell systems that generate electricity for home use.
The Non-business Energy Property Credit, also known as the Residential Energy Property Credit, is available for homeowners who make energy-efficient upgrades to their primary residences. This credit can be claimed through December 31, 2021, and covers 10% of the cost of the qualified energy-efficient improvements, and improvements must be made to an existing home. This credit covers expenses for qualified improvements such as insulation, exterior windows, and doors, and a new roof installed on the residence.
Commercial Energy Credits
The Business Energy Investment Tax Credit (ITC) provides tax credit incentives for businesses that invest in renewable energy or clean energy systems. Under current tax legislation, the Business Energy Investment Tax Credit offers a maximum credit of 26% for solar systems, geothermal systems, small wind turbines, and fuel-cell systems.
The Section 179D deduction is a tax incentive aimed at encouraging energy-efficient upgrades for commercial buildings. The deduction allows property owners to claim up to $1.80 per square foot for energy-efficient upgrades that reduce the overall energy costs of buildings. Eligible upgrades include building envelope improvements, HVAC improvements, and lighting upgrades.
The qualifications for energy tax credits vary depending on the type of tax credit being claimed.
Residential Energy Credits
To qualify for Residential Energy Efficient Property (REEP) Credit, the property must meet certain criteria. The energy-efficient upgrades must be made to the taxpayer’s primary residence, and the home must be located in the United States. The credit may only be claimed for the costs of qualified improvements such as solar panels, geothermal heat pumps, small wind turbines, and fuel cell systems.
To qualify for the Residential Energy Property Credit, the upgrades must be made to an existing home, and the taxpayer must be the owner of the primary residence. The credit applies to qualifying expenses related to the improvement of energy efficiency, such as insulation, exterior windows and doors, and roofs that meet Energy Star standards.
Commercial Energy Credits
To qualify for the Business Energy Investment Tax Credit, the property must be owned by the taxpayer and must generate electricity from a renewable energy system. The renewable energy systems may include solar, wind, geothermal, and fuel cell systems. The credit applies to commercial, industrial, and agricultural properties.
To qualify for the Section 179D Deduction, the taxpayer must own or lease a commercial building and make energy-efficient upgrades or improvements to the property’s interiors, HVAC, or lighting systems that reduce the building’s energy consumption. The deduction applies to commercial, industrial, and agricultural properties.
How to claim energy tax credits
To claim energy tax credits, taxpayers must complete the appropriate tax forms and documentation. To claim the Residential Energy Efficient Property (REEP) Credit, taxpayers must complete IRS Form 8379, Residential Energy Credits. To claim the Non-business Energy Property Credit, taxpayers must complete IRS Form 5695, Residential Energy Credits. To claim the Business Energy Investment Tax Credit, taxpayers must complete IRS Form 3468, Investment Credit. To claim the Section 179D Deduction, taxpayers must complete IRS Form 8908, Energy Efficient Commercial Building Deduction.
Additionally, taxpayers must retain proper documentation to support their energy tax credit claims. This documentation includes invoices for the cost of energy-efficient upgrades, proof of the property’s energy efficiency rating, and a certification from a qualified tax professional stating the energy-efficient upgrades meet the necessary requirements.
Changes and updates
As with all tax incentives, energy tax credits are subject to change. For example, the tax credit for residential solar panels, known as the Solar Investment Tax Credit (ITC), is set to decrease starting January 1, 2023. The credit, currently set at 26%, will reduce to 22% in 2023 and expire at the end of that year. Taxpayers must stay up to date with current legislation to ensure they take advantage of available tax credits.
Energy tax credits are an excellent way for individuals and businesses to reduce energy costs and promote sustainability. By making energy-efficient upgrades to their homes and commercial properties, taxpayers can save money on energy costs while contributing to the fight against global climate change. Individuals and businesses should consult with a qualified tax professional to ensure they are taking advantage of all available energy tax credits. By doing so, they can benefit from substantial savings while promoting environmental sustainability.
An energy tax credit can be a federal tax credit that is assigned to provide individuals with tax credits for energy efficiency. Two recent tax credits for energy efficiency that were passed during the start of the 21st Century were the Non-business Energy Property Tax Credit, a part of the Energy Policy Act of 2005, and the Federal Roofing Tax Credits for Energy Efficiency, part of a 2009 twofold plan developed by the United States Federal government.
Both of these tax credits for energy efficiency are used to promote renewable energy development. These energy tax credits help to promote renewable energy development to cover the advancement, capacity growth, and the use of renewable energy sources.
These tax credits for energy efficiency are linked to concerns about mitigating climate change, the creation of greenhouse gases, the use of fossil fuels, and addressing the social, environmental, and political consequences of continued use of fossil fuels or nuclear power.
Tax credits for energy efficiency may be assessed for the items that are purchased, such as buying an Energy Star appliance or using Energy Star rated materials. However, there are many restrictions placed on collecting an energy tax credit.
The restrictions placed on collecting the Federal Roofing Tax Credit for Energy Efficiency requires that the roof be made out of particular materials, be applied between a January 1, 2009 and December 31, 20100, and be the taxpayer’s primary residence.