Residential Renewable Energy Tax Credit

Section 13302 of The Inflation Reduction Act of 2022 (H.R. 5376) has extended the expiration date and altered the phase down of this tax credit. Additionally, it now includes stand-alone energy storage systems as eligible for the credit and excludes biomass heaters, which are now covered under the residential energy efficiency tax credit. The following summary reflects these changes post the enactment of H.R. 5376.

Taxpayers can claim a credit for systems that are installed in a dwelling unit within the United States, owned and used as a residence by the taxpayer. Costs are considered at the time of installation completion, or for new homes, when the homeowner takes occupancy. Eligible expenditures include labor for on-site preparation, assembly, original system installation, and the costs for connecting the system to the home. If the credit amount exceeds the tax liability, it can be carried over to the next tax year. The maximum credit allowed, equipment requirements, and other specifics vary based on the technology type.

Solar-electric property: Credit percentages vary by installation date, with 30% for systems installed by 12/31/2019, then reducing to 26% until 01/01/2022, increasing back to 30% until 01/01/2033, then phasing down to 22% by 01/01/2035. No maximum credit limit for systems installed post-2008, and the system must be in service between January 1, 2006, and December 31, 2034. The principal residence requirement is not mandatory.

Solar water-heating property: Similar credit phases as solar-electric, with specific requirements for equipment certification and energy usage from solar. The credit is not applicable for heating pools or hot tubs. The principal residence is not a requirement.

Fuel cell property: Credit phases are the same as solar, with a maximum credit of $500 per half kW and specific efficiency and capacity requirements. The home must be the taxpayer’s principal residence.

Small wind-energy property and geothermal heat pumps: Follow the same credit phase as solar-electric and water-heating properties, with no maximum credit post-2008 and no principal residence requirement.

Battery Storage Systems (Standalone Systems): Eligible for a 30% credit for systems installed after 12/31/2022, phasing down to 22% by 01/01/2035. Systems must have a minimum capacity of 3 kilowatt-hours, and the principal residence requirement is not mandatory.

The American Recovery and Reinvestment Act of 2009 removed the limitation of using the credit for projects also supported by “subsidized energy financing” for projects in service after December 31, 2008.

Energy Storage: Prior to the Inflation Reduction Act of 2022, stand-alone energy storage systems were not explicitly mentioned in the tax code and thus were not eligible for the credit. However, IRS rulings in 2013 and 2018 considered energy storage paired with PV systems as eligible. These rulings are specific to the taxpayer requesting them and do not set a precedent. Taxpayers should consult a tax professional before claiming the credit for energy storage systems.

History: Initially established by The Energy Policy Act of 2005, covering solar-electric systems, solar water heating systems, and fuel cells. The 2008 Energy Improvement and Extension Act expanded this to include small wind-energy systems and geothermal heat pumps, with significant enhancements made by The American Recovery and Reinvestment Act of 2009, including the removal of the maximum credit limit for most technologies post-2008.