Energy tax credits: what are they and how do they work?

Here we’ll answer some frequently asked questions about energy tax credits. 

What are energy tax credits?

A tax credit reduces the dollar amount you owe in taxes at the end of each fiscal year.

Common examples include child tax credit and work opportunity credit. Federal energy tax credits apply specifically to energy.

Several types of credit are currently available, including residential credits for homeowners and production and investment credits for businesses (more on these options below).  

If you’re looking for ways to go green and invest in sustainability while saving money, you may have already cut down on your energy consumption or made certain changes.

Since 2005, for example, the number of US homes with solar panels installed has been rising by 32 per cent each year.  

How does the federal solar tax credit work?

In August of last year, the Biden administration launched the Inflation Reduction Act, which outlined the president’s policies on energy tax credits for 2022 and beyond.

But how does the solar tax credit work? As outlined above, it’s an incentive. 

America’s energy consumption was equal to 4.87 billion tons in 2021. With the environment in mind, the US government is keen to encourage individuals and businesses to switch to renewable solar (and wind-powered, where possible) alternatives.  

Renewable energy tax credits are often described as solar panel tax credits because solar panels are one of the most common, simple options available to consumers in the arena of renewable energy.

They apply when individuals and businesses meet the criteria, and they reimburse people by reducing the total amount of income tax that they owe to the Internal Revenue Service (IRS).  

What are the different types of energy tax credits?

Overall, the current slate of energy tax credits, as outlined in the Inflation Reduction Act, puts $369 billion into the fight against climate change.

As mentioned above, available energy tax credits can be broken down into two categories — credits for individual homeowners and credits for businesses/business owners.

Individual homeowners can be eligible for two different credits:

• The Energy Efficient Home Improvement Credit - This new-and-improved credit officially kicked in on January 1, 2023.

  It’s available to homeowners installing insulation, windows, doors and other green improvements.

  Using this credit, you can claim 30 per cent to cover the costs, with a maximum spend of $1,200 (up $700 from 2022) that’s reset annually

• The Residential Clean Energy Credit - This is a tax break available to homeowners maintaining and/or installing solar, wind, geothermal and biomass renewable energy sources in or on their properties.

  You can claim 30 per cent, as with the Energy Efficient Home Improvement Credit, until 2033 (when the claim amount will drop back down to 26 per cent).

Businesses are also eligible for two different energy tax credit options.

By reducing their consumption and taking the initiative to install energy-efficient systems, they can become eligible for either the Production Tax Credit (PTC) or the Investment Tax Credit (ITC).  

Which home improvements qualify for energy tax credits?

If you’re a homeowner, certain improvements and how they’re used will determine whether or not you’re eligible to receive federal energy tax credits.

For example, solar panels and solar-powered water heaters are covered, provided the panels are only used in your home, and the solar-powered heating isn’t used for hot tubs or swimming pools.

Other qualifications and stipulations to bear in mind include the following: 

• Wind turbines will qualify IF they are for residential use up to 100 kilowatts per hour 

• Geothermal heat pumps will qualify IF they meet federal Energy Star regulations 

• Renewable fuel cells will qualify IF they generate at least 0.5 kilowatts of power 

How do I claim an energy tax credit?

All you have to do to claim your energy tax credit as a homeowner is fill in your tax return and be accurate about where you’ve improved the sustainability of your home, requesting a tax break where you’re eligible.

You probably won’t be asked to provide any supporting documentation, but keep that documentation on hand — just in case.

At some point, the IRS may want proof that you made the purchases you claimed to have made. 

What makes businesses eligible for energy tax credits?

To be eligible for either of the renewable energy tax credits available to businesses, a company must be in the US or its territories and cannot be a tax-exempt entity.

Though in some cases, if a premises is tax-exempt, the ITC can still be received via direct payment. They must then invest in energy efficiency and environmental protection, as explained earlier. 

In 2022, 67 per cent of companies started using greener materials and practices, cutting down their emissions in some effective and important ways.

Many US businesses are already eligible for the ITC or the PTC, and many more are likely to join them over the course of 2023.  

It’s also worth noting that if businesses are in certain communities (such as low-income areas) and meet certain domestic requirements, they may be eligible for bonus credits.

These equal ten per cent of both the ITC and the PTC for products in service after December 2022.  

How can my small business claim an energy tax credit?

There are two ways small businesses can claim an energy tax break.

The first is to find and fill out the year-specific tax form from the IRS. This is most easily discovered via the IRS’s business tax credit database or via your individual state’s online portal.  

The second is to employ a professional tax expert or financial advisor to offer their assistance, identifying the correct credit forms on your behalf and assisting you in filling them out.

As with all financial advice, a professional eye goes a long way. 

Where can I find out more about energy tax credits?

If you’re still looking for more information about energy tax credits, including timely updates and in-depth explanations of parameters, exceptions and eligibilities, the IRS website and the Department of the Treasury will be your best bets. 

If you have more money questions regarding anything from credits to insurance, we’re well-placed to answer them.

Continue to check out our blog for even more valuable insights.