Expiring Home Energy Credits Calls for Urgency From Tax Advisers

The Republican tax package signed into law July 4 is set to eliminate federal incentives for residential energy efficiency and home energy improvements for expenditures made after Dec. 31. Many homeowners are unaware these credits exist, let alone that they are ending.

Tax advisers who work with home service providers such as window and door companies and solar installers would be wise to urge their clients to educate potential customers and help spread the word that these credits are short-lived.

Expiring Opportunities

Tax credits for qualifying home efficiency upgrades—such as Energy Star rated windows; doors; insulation; and heating, ventilation, and air conditioning equipment—or for the installation of renewable energy property—such as solar photovoltaic systems and home batteries—will be eliminated at the end of this year.

The energy efficient home improvement credit offered under Section 25C of the Internal Revenue Code was short-lived. Enacted only recently under the Inflation Reduction Act of 2022, the credit provided residential homeowners with a nonrefundable income tax credit equal to 30% of “qualified” expenditures, up to a maximum of $3,200, with subcaps on specific items as described below:

In addition to eliminating the home efficiency credit, the GOP tax package also eliminates the residential clean energy credit offered under Section 25D. Enacted in 2005, it provides homeowners with a 30% tax credit for installing clean energy devices such as rooftop solar and home battery backup systems.

Home efficiency credits and residential energy credits are generally available only for qualifying property that is actually placed in service during the year. This means homeowners can’t claim the tax credits by merely purchasing qualifying property this year—the property must be installed and operational (known as placed in service) by Dec. 31.

The placed-in-service requirement may present a challenge for last minute installations if the system requires utility inspection, approval, and permission before becoming operational. If a homeowner merely purchases solar panels in December 2025 but the system doesn’t receive operational approval until February 2026, the system will have been placed in service after the Dec. 31 deadline, and the purchase likely won’t qualify for any tax credit.

Homeowners seeking to avoid delays stemming from utility or regulatory approvals might consider a solar plus storage system—with minimum 3KwH capacity, per Section 25D(d)(6)(B)—that is capable of operation before or without utility or regulatory approvals. Homeowners considering such systems should, of course, check with their tax advisers to ensure plans are compliant with the tax credit requirements and local laws.

Compliance and Monetization

Tax advisers with clients looking for year-end tax strategies might note that these credits can be considered when calculating year-end estimated tax payments. Reducing year-end payments allows these credits to be monetized almost immediately, which typically is a better option than overpaying and claiming a refund later.

However, with clients in the midst of urgent action, advisers also must note the compliance requirements. In addition to the critical placed-in-service requirement discussed above, Sections 25C(g) and 25D(f) require taxpayers to reduce their tax basis by the amount of credit claimed.

Because these expenditures and credits affect the basis in property, the applicable records generally must be retained until they’re no longer relevant—that is, the standard three-year retention requirement is extended, and records generally must be retained until after the home is sold.

Also, not all labor costs are “qualified” expenditures eligible for the tax credit. In general, labor costs associated with installing rooftop solar or battery backup under Section 25D and certain HVAC equipment under Section 25C can be qualified costs, but labor costs for installing energy efficient windows, doors, and insulation don’t qualify. Well-advised taxpayers should be requesting invoices with separately stated labor costs, particularly if their projects involve both eligible labor (solar installations) and non-eligible labor (energy efficient windows and doors).

Urgency Drives Action

Capitalizing on urgency can drive short-term action. Home service providers shouldn’t just wait for the year-end rush—they should lead the charge, advertising urgency from rooftops (solar-paneled or otherwise).

If 30% initial cost savings isn’t enough, service providers might go a step further by illustrating the net present value or how the 30% credit significantly reduces the return on investment period for home solar or other installed equipment.

As the sun sets on these vital incentives, the message for consumers is clear: Time isn’t on our side, but opportunity still is. Home service providers who educate consumers with facts on these expiring tax credits will help their clients lock in lucrative savings.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Max Van Benschoten is an associate at Gray Reed who advises on a wide range of federal tax matters, with strong experience in partnership transactions, mergers and acquisitions, traditional and alternative energy transactions, and insolvency restructuring.

Austin C. Carlson is a partner at Gray Reed, focusing on M&A deals, complex corporate and tax planning for domestic and international transactions, and foreign account and income disclosure and penalty abatement issues.

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