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Why the Inflation Reduction Act Matters for HVAC and Solar Contractors

Why the Inflation Reduction Act Matters for HVAC and Solar Contractors

The Inflation Reduction Act (IRA), which was signed into law in August 2022, invests $370 billion to reduce greenhouse gas emissions, create good-paying jobs in clean energy, and improve household energy efficiency across the U.S. It is the most significant federal climate investment in U.S. history. These residential and commercial energy efficiency-focused investments are divided between rebates, training grants, and federal tax credits — explained more in depth below.

Tax Credits

Some Inflation Reduction Act funding is not yet available, as federal guidance is pending, and states are still designing their programs to meet federal guidelines. However, homeowners and building developers can take advantage of federal tax credits immediately!

The IRA expanded and extended several energy efficiency tax credits for homeowners as well as residential and commercial building developers. In particular, the IRA revitalizes tax credits found in Internal Revenue Code Sections 25C, 25D, and 45L.

25C – the Energy Efficiency Home Improvement Tax Credit

The Energy Efficiency Home Improvement Credit offers homeowners an annual tax credit for energy efficiency home improvements.

It replaced the Non-business Energy Property Credit, which was previously a lifetime credit of just $500. The IRA updated this credit to provide annual credits of up to $1,200 per year plus an additional $2,000 for heat pumps and heat pump water heaters. The shift from a lifetime credit to an annual credit provides significantly more flexibility to homeowners, who will now be able to spread out their home energy improvement projects over the 10-year life of the 25C credit. 

Key takeaways:

  • Starting in 2023, credit increases to 30% of total installation costs through 2032.
  • Lifetime cap of $500 will be replaced by annual $1,200 total limit (plus an additional $2,000 for electric heat pumps).  
  • 25C credits be combined with rebates offered through DOE’s $8.8 billion Home Energy Rebates Program, an IRA program not yet available to the public.  

Eligible services and home improvements include:

  • Heat pumps and heat pump water heaters ($2,000 credit)
  • Insulation and air sealing ($1,200 credit, installation costs not covered)
  • Energy audits ($150 credit)
  • Energy-efficient HVAC systems, incl. furnaces, boilers, and central AC ($600 credit)
  • Electrical panel upgrades ($600 credit)
  • Energy-efficient windows and doors ($500 credit for doors, $600 credit for windows, installation costs not covered)
  • Roofs are no longer eligible
  • A separate $2,000 annual limit for heat pumps and heat pump hot water heaters

45L – New Energy Efficient Home Credit

IRC Section 45L, the New Energy Efficient Home Credit, offers tax credits to single-family and multi-family home builders for new (or substantially reconstructed) energy efficient homes. 

45L provides two tiers of tax credits depending on which standards eligible construction or re-construction projects meet. Single-family home projects (including manufactured homes) that meet ENERGY STAR standards are eligible to receive a $2,500 tax credit, while new multi-family dwelling units can receive $500 per unit. The higher tier of credits created by the IRA is available to homes that meet DOE Zero Energy Ready Home Program requirements, which are more stringent than ENERGY STAR. For projects that qualify for this higher tier, builders can receive $5,000 per single-family home and $1,000 per multi-family dwelling unit.

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
  • Energy-efficiency standards are higher in the IRA-version of 45L than before
  • No limits on the number of single family or multi-family units that can qualify for a 45L credit
  • Credits are boosted for projects where workers are paid “prevailing wages.”

25D – Residential Clean Energy Property Credit

Under the Inflation Reduction Act, taxpayers can receive a tax credit to cover 30% of the costs of installing solar energy property on their homes, in addition to other clean energy improvements. For example, this credit also applies to solar systems that are paired with battery storage. Starting on January 1, 2023, this credit will also apply to standalone battery storage installed without solar. For a full list of upgrades that are eligible for this tax credit, click here.

Key Takeaways:

  • Raises credit from 26% to 30% through 2032; will step down in 2033 and be eliminated for residential in 2035.
  • Credit is retroactive to solar systems installed during the 2022 tax year. 
  • There is no maximum dollar amount that can be claimed. 
  • Starting in 2023, stand-alone battery storage qualifies for a credit.

Rebates & Training Grants

In addition to tax credits, the Inflation Reduction Act also sets aside $9 billion in funding for residential energy efficiency upgrades as well as training for home energy performance contractors!

$8.8 Billion Home Energy Rebates Program

The IRA created two new programs that will provide households with $8.8 billion in rebates for high efficiency electric appliance upgrades and whole-home energy retrofits. Collectively, they are known as the Home Energy Rebate Programs. Individually, they are referred to as the Home Efficiency Program and the Home Electrification Program. Home Energy Rebate funding will be distributed to state energy offices and subsequently flow to program implementers – who will vary from state to state based on each states’ unique program design and guidelines. Rebates are expected to be available to the public in early 2024.

$4.3 billion for DOE Home Efficiency Program  

  • Formerly referred to as the Home Owner Managing Energy Savings or “HOMES” Program.
  • Rebates amounts are performance-based: the more energy you save, the more you earn.  
    • Up to $2,000 for energy efficiency retrofits with modeled energy savings of 20-34%.  
    • Up to $4,000 for energy efficiency retrofits with modeled energy savings of 35% or more.
  • Upgrades can include HVAC and other electric appliances as well as weatherization measures (e.g. insulation, air sealing, windows/ doors, etc.)
  • Low-moderate income households are eligible for additional rebates up to $8,000.
  • Home Efficiency rebates cannot be combined with other federal grants or rebates, but CAN be combined with state/utility rebates and federal tax credits.

$4.5 Billion for DOE Home Electrification Program

  • Rebates targeted towards low-moderate income households for high-efficiency electric appliances and equipment
  • Maximum rebate of $14,000 per household
  • Eligible upgrades and their rebate amounts are as follows:
    • Heat pump water heaters: $1,750
    • Heat pump for space heating and cooling: $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
    • Installation: $500
  • Home Electrification rebates cannot be combined with other federal grants or rebates, but CAN be combined with state/utility rebates and federal tax credits.

$200 Million for Residential Energy Contractor Training

Officially known as DOE’s Training for Residential Energy Contractors or “TREC,” this grant program sets aside $200 million for state energy offices to fund their own workforce development activities specifically for residential home energy performance contractors. DOE expects to distribute these funds to states as early as 2023, and will be available to states through September 2031.

Some say that the climate bill could create up to 1,000 new companies. Its passage will be huge for startups as well as the big venture capital firms that back them. In other words, it’s a great time to start a solar company and get in on the influx of cash coming from this legislation.

Perhaps the biggest impact is that government investment in climate initiatives will give private investors and consumers much more confidence in the climate space. This could reveal itself by way of utilities offering rebates for solar panel installation and home energy audits, which in turn drives up homeowner demand and CREATES MORE WORK in the industry.

Are you prepared for the new business coming your way? Start honing your skills now so that you can take full advantage of this funding!

The biggest chunk of money from this legislation goes to clean energy, such as solar. Browse Our Solar Courses and learn how to sell, design & install solar panel systems!

The bill also includes rebates for people who invest in energy-efficient home improvements, which means a lot of homeowners are going to be wanting home energy audits. This just screams BPI Building Analyst – register today so you’ll be certified and ready to get that business!

Learn more about Everblue's BPI Building Analyst Training

About Lesley Baulding

Lesley has been passionately advocating for and working with green building and renewable energy since 2009. She has experience with LEED certification, home energy auditing, blower door testing, solar energy, and more. She holds many certifications, including LEED Green Associate and NABCEP Certification. Her work has won numerous awards over the past decade.