AGH urges the IRS to issue guidance on wood heater eligibility for tax credits

Thank you for this opportunity to provide comments.  IRS guidance on wood heaters is long overdue.  The Alliance is an independent non-profit organization that strives to represent the interests of consumers of wood and pellet heaters.  We believe a tax credit for wood and pellet heaters is essential as we transition from fossil fuel to renewable fuels. 

The IRS asked whether guidance needed to define the term "thermal efficiency rating"? If so, what testing procedures should the Treasury Department and the IRS consider requiring or permitting to be used by manufacturers to measure thermal efficiency and demonstrate ratings that are valid for purposes of the § 25C credit?

 

Summary: The most reliable method to protect consumers, ensure that tax credits are going to compliant models and create a level playing field for manufacturers is for Treasury/IRS to specify that eligibility is limited to units listed in the EPA Certified Wood Stove Database that have an overall weighted average efficiency of 75% or more using the higher heating value of the fuel.  

 

Using the EPA database to determine eligibility is the most effective solution from a variety of public policy perspectives but it is not without problems: multiple test methods result in disparate EPA seasonal average efficiency results for wood and pellet boilers, which are not comparable, and which are not helpful for consumers or for the purposes of setting an efficiency threshold for the tax credit.  The EPA is aware of the problem but an impending change in IRS guidance on wood heater tax credits is likely to hurt members of the industry who sell some of the most sophisticated modern wood heating equipment.  We urge the IRS to consult with the EPA on this problem and find a solution as soon as possible.

 

In addition, we urge the IRS to make it clear that the $2,000 tax credit for wood heaters is in addition to the $1,200 for other 25C qualifying home projects, not instead of them. The IRS should clarify that the full $3,200 is available to taxpayers. We also urge the IRS to confirm that 25C tax credits are available to renters, not just to owners of residences, based on the removal of the term “owner” by Congress.

Finally, the IRS asked for comments on certification or other requirements for home energy auditors.  We urge the IRS to affirm that when energy auditors are directed to inspect HVAC systems, that wood and pellet heaters are recognized as legitimate heating devices and need to be inspected for safety based on nationally recognized criteria, just as other heating systems are.  Various agencies and institutions such as DOE, NREL and BPI have begun to address this problem but wood heater remain marginalized, leaving many older, self-installed units that pose fire hazards and are not being properly inspected.

Background on wood and pellet heater testing: There is universal acceptance among test labs and manufacturers that efficiency is measured using in accordance with CSA B415.1-10.  When stoves are tested for EPA certification, the traditional test is to use the EPA’s “Method 28” which consists of 4 burn rates, from low (Category 1) to high (Category 4).  The lowest burn rate allows the lowest amount of air to flow through the stove and typically produces a higher efficiency.  High burn rates allow maximum airflow through the stove, and typically produce lower efficiencies.  The labs then combine these 4 efficiency numbers and produce “a weighted average efficiency” which is what is recorded on the EPA database of certified heaters as “overall efficiency.”

CSA B415 produces three types of efficiency: Overall efficiency, combustion efficiency and thermal efficiency.  The EPA uses Overall Efficiency to get an Average Overall Efficiency” and EPA guidance on testing deficiencies makes no reference to “thermal efficiency.”  Even within the wood and pellet heater industry, there is confusion between the terms “overall efficiency,” “thermal efficiency” and “weighted average efficiency.” The image below is an representative example of how test labs report efficiencies.  

Each of the four burn rates produces an overall efficiency number, and combustion efficiency number and heat transfer, or thermal efficiency number.  The EPA averages the four overall heating efficiency numbers to get a weighted average efficiency.  In the EPA database, this weighted average efficiency is in the column titled “Overall efficiency- HHV.” (The EPA used to use the term “Actual measured efficiency CSA B415.1 after they stopped using default, estimated efficiencies in 2015.)

There are eight labs approved by the EPA to conduct certification testing, including one in Canada, Czech Republic, Denmark and Sweden.  The labs do not use efficiency terminology consistently, and often just refer to “efficiency” rather than “overall efficiency” or “weighted average efficiency” rather than “weighted average overall efficiency.” All labs clearly distinguish HHV and LHV, and no lab uses “thermal efficiency” in their weighted averages, as far as we know.

However, some manufacturers will use “Heat transfer efficiency” otherwise known as “thermal efficiency” numbers to qualify models for the tax credit because they tend to be 1-2% higher than “overall efficiency.” Thus, if a stove has an average overall efficiency of 75%, it could have a single burn rate as low as 69%, using thermal efficiency numbers.  No manufacturer uses combustion efficiency for purposes of the tax credit as far as we know.  Combustion efficiencies tend to be in the 96-98% range.

Wood heaters are tested by EPA approved labs and then the EPA uses the data in the report to certify the stove for sale. Once it’s certified the EPA puts summary data on its Database of certified wood heaters. Since 2015, the EPA has also required manufacturers to post the non-confidential parts of their lab test report on their website.  Those reports are public and you can find the efficiency numbers for each burn rate, but they are not easy for consumers to navigate. On the contrary, they are dense, full of fine, highly technical jargon and are only used by regulators and experts.

Statistics: Currently, 25 of the 31 central wood heaters are eligible for the tax credit, using the EPA list.  113 of the 262 room heaters are above 75%, using the EPA list.  Overall, that would make about half of all heaters eligible, if the IRS were to use the efficiencies listed on the EPA database.

Public policy considerations: To achieve a level of transparency for the consumer, using the EPA database of certified heaters is an obvious solution.  Some consumers care about efficiency and the only place that consumers can make side-to-side comparisons is on the EPA database.  With pellet stoves, efficiency typically matters more than wood stoves because unlike cordwood, all pellets must be purchased, and a more efficient stove can save consumers by using less fuel.

If the IRS wants to be more lenient with manufacturers and allow more than about half of heaters to qualify, it could keep allowing manufacturers to issue certificates without any guidance, or specifically say that if any burn rate achieves 75% efficiency or more, it can be eligible for the tax credit.  If the IRS specified this, we expect all manufacturers would quickly adopt this system and about 80% or more of appliances would be deemed eligible.

Public policy is also served by setting a level playing field for all manufacturers, instead of allowing some brands to undercut others by claiming their units are eligible for the tax credit when they are below 75% on the EPA database.  Almost all US manufactures now use the EPA database to determine if their models are eligible.  

By setting an efficiency threshold for wood heaters, certain types of wood heater benefit.  The Alliance for Green Heat has monitored the changes to efficiency in wood heater for more than 10 years and documented the various ways that manufacturers claim that their stoves are eligible for the tax credit.  The averages below were calculated several years ago, when efficiencies were lower but the conclusion is remains the same: hybrid wood stoves have on average, the highest efficiencies are virtually all of them qualify for the tax credit, under any definition.  More manufacturers are building hybrid stoves in order to qualify for the tax credit and whereas there were only 6 models several years ago, today there are at least 21. Non-catalytic stoves, the cheapest, most popular, and most basic stove, have the hardest time reaching 75% efficiency. Today, only 15 out of 113 non-catalytic models are 75% or over.

From a public policy perspective, setting a 75% efficiency minimum, using the EPA database of certified heaters, is positive in that it tends to favor stoves that emit fewer particulate matters (PM) emissions.  Non-catalytic stoves tend to have higher emissions both in the lab and in the hands of homeowners if other factors are equalized such as moisture content of wood and ability of the operator. Pellet stoves and hybrid stoves tend to the cleanest, as used by homeowners.

Many taxpayers want to be able to download a certificate of eligibility to keep in their files, and taking a screen shot of the EPA list may not be as easy or feel as secure. The owner’s manual of the stove almost always has the weighted average efficiency, so that can also serve as proof of eligibility for the taxpayer.

There are two classes of heaters that would be unfairly penalized by an IRS requirement to base eligibility off the efficiency numbers in the EPA database.  The first is that multiple test methods result in disparate EPA seasonal average efficiency results for some indoor wood and pellet boilers which are abnormally low and are not comparable to other boilers or helpful for consumers or for the purposes of setting an efficiency threshold for the tax credit.  The EPA is aware of the problem, as is NESCAUM and NYSDERDA who are involved in testing programs to try to identify the calculations and assumptions leading to this problem and then find a solution.

The second are Masonry heaters are also penalized but since they do not yet have a pathway to EPA certification, the solution is more complicated. There are consistent and reliable ways to test factory-built masonry heaters and those manufacturers could issue Certificates of eligibility for the tax credit, but they will not be listed on the EPA database.  Standard combustion chambers used in site-built masonry heaters could also be tested but this is more complicated.  The Masonry Heater Association is the point group on this issue.

IRS options

The IRS has several options, depending on what their goals are.  

 

1.     The first, and best option, in our opinion is to use the “overall efficiency” numbers listed on the EPA database of certified wood heaters be the sole arbiter and end the practice of using manufacturer certificates, or only allow manufactures to issue certificates for heater models that are listed at 75% efficiency or higher on the EPA database. Many of the benefits of this are discussed above in the public policy discussion.

 

2.     There is a hybrid option of allowing manufacturers to issue certificates of eligibility if a model exceeds is 75% efficient or over for stoves and outdoor boilers or furnaces, or is 75% or more overall efficiency on any of their burn rates for indoor boilers or furnaces. 

 

3.     There is the current system, where manufacturers self-issue a certificate to declare that a particular model is eligible, sometimes without any reference to efficiency figures or definitions. This has resulted in manufacturers claiming models with weighted average efficiencies as low as 64% to be eligible. This has also allowed manufacturers to claim units that are not EPA certified to be eligible without providing any efficiency data. Another weakness of this option is that there is no agency with the time, resources, or agility to provide enforcement in this area, leaving consumers vulnerable to false claims. 

 

On the following pages, we have included representative samples of four types of manufacture certificates of eligibility for the tax credit.  The disparity of the language used and the range of models that are claimed to be eligible for the credit show a clear need for more guidance for the IRS.

 

A. Example of a certificate that claims eligibility without reference to efficiency, even though it appears all units are above 75% efficiency based on the EPA database.

 

B. Example of a company that claims its units are eligible, even though they are well below 75% on the EPA list and do not meet 75% even on individual burn rates.

 

C. Example of EPA non-certified stoves without EPA approved third party lab efficiency data to claim eligibility.

 

D. Example of a certificate that claims models are eligible solely because they are “qualified energy property” with no reference to efficiency.

 

Consumers can now rely on almost all stove tax credit certificates issued by manufacturers

A sampling of tax credit certificates
issued by various manufacturers 

After ten years, almost all stove and boiler manufacturers appear to be accurately informing their consumers about which models are eligible for the tax credit for wood heaters that are at least 75% efficient.  Some outlets, such as We Love Fire, a network of 280 hearth retailers, go out of their way to educate customers on how to ensure the stove they are buying qualifies for the credit and urges them to check the EPA’s database.

There was widespread exaggeration and misleading advertising about stove efficiencies in the preceding decade, and the EPA did not require wood and pellet stove manufacturers to disclose the efficiency of their models, or even to test for it until 2015.

Consumers are often advised to download the manufacturer certificate and keep it in their files, along with the receipt for the stove, as proof that they properly took the credit.  However, the IRS does not require manufacturer certificates, and a screenshot of the EPA database, showing an efficiency of at least 75% for your model is even better documentation.

 

When Congress passed the new, higher tax credit legislation in 2020, they specified that the minimum 75% efficiency level must be measured using the higher heating value (HHV), eliminating previous ambiguity. However, Congress did not specifically refer to the EPA’s database, which lists the HHV efficiency of all stoves, boilers and furnaces.  Almost all of industry accepts the EPA database should be used to confirm efficiencies and encourages consumers to check it.  The Hearth, Patio & Barbecue Association (HPBA), the industry’s largest association, broke from its past practice and took a strong position that consumers should rely on the EPA database to determine efficiency.

 

The Ashley line of stoves is owned 
by US Stove, which issued this
current certificate.

AGH reviewed scores of certificates issued by stove and boiler manufacturers by brands such as Hearthstone, Jotul, Lopi, Quadrafire and many others and found for the first time that they all were providing their consumers accurate information.  We found only one stove manufacturer, US Stove Company, still willing to list stoves as qualifying for the tax credit that are under 75% efficient.  US Stove issued a certificate saying that four of its pellet stove models qualified for the credit despite test reports from third party EPA-approved labs showing the models have efficiencies of 64%, 66% and 69% (which is also how they are listed on the EPA database).  (As of Sept. 2022, US Stove still claims these units qualify for the tax credit.) The average pellet stove is about 73% efficient. Their test reports are provided on the US Stove website.  

John Voorhees, Vice President for Compliance at US Stove, signed the tax credit certificate that states

The Ashley certificate juxtaposed with
the EPA database 

“Under penalties of perjury, I declare that I have examined this certification statement, and to the best of my knowledge and belief, the facts are true, correct, and complete.”  AGH reached out to Mr. Voorhees for clarification and to ensure the US Stove position was included in this blog, and though we exchanged many emails and US Stove provided relevant information, the company declined to permit AGH to quote from that exchange.  AGH will update this blog if US Stove chooses to provide any information that we can make public.

 

It is unclear why US Stove singled out the four models on this certificate when other models are listed with higher efficiencies, though none are above 75% except for one pellet stove made by their Breckwell brand.  When the tax credit was first passed by Congress in 2009, most companies declared that all of their models qualified.  That year, US Stove issued a certificate saying that 24 models were eligible for the credit requiring a minimum of 75% efficiency.  

In 2009, like many manufacturers, US
Stove listed all or almost all of of their
 models as meeting the requirements of
the 75% minimum efficiency tax credit.

Today, most boiler and furnace companies also seem to be following Congress’s plain language and only certifying units at 75% or more.  Boiler efficiencies are more complex because there are several test methods and the resulting efficiencies aren’t as comparable as they are with wood and pellet stoves. AGH found one indoor wood furnace manufacturer, Hy-C who makes the Shelter furnace, tested at 70% efficiency by the lab but the company issues a Certificate of Qualification that it meets the 75% HHV threshold. 

 

Tax credits for consumer appliances have a variety of purposes, in addition to incentivizing consumers to buy higher efficiency appliances.  They are designed to influence manufacturers to improve product efficiency, accelerate market penetration of more efficient products and potentially prepare the market for future mandatory requirements.  Currently, there is no required minimum efficiency for wood and pellet heaters.  For pellet stoves like the ones in question, they range from 58% efficient for a model produced by US Stove, to an 87% efficiency unit from Cleveland Iron works.

 

Wood and pellet stoves and boilers are an excellent way to reduce fossil fuels and affordably heat your home, especially in seasons like this one when fossil fuel prices are high.  Federal tax credits are an efficient way to help households reduce fossil fuel use with a renewable, low carbon fuel.  However, unless consumers use seasoned wood of under 20% moisture content, wood stoves can produce excessive smoke and will not reflect the efficiency achieved in the test lab.  AGH considers pellet stoves to be the optimum choice, as their combination of high efficiencies and very low particulate matter make them suitable for both rural and more densely inhabited towns and suburban areas.  Unlike wood stoves, the efficiency numbers achieved in the lab can generally be achieved by consumers if the unit is maintained properly. 

 

Even though most manufacturers are now issuing tax credit certificates for stoves that are at least 75% efficient, AGH urges consumers to also check the EPA’s database of wood heaters to be sure.  AGH has been in touch with IRS officials, urging them to issue guidance that wood heaters must be listed at 75% efficient or higher on the EPA database to close any remaining loopholes that a few manufacturers still try to use.  

Further reading

AGH urges the IRS to recognize efficiencies in the EPA database, Feb. 2021

Guidance on the 26% tax credit for wood heaters, Jan. 2021

A review of wood and pellet stove efficiency ratings, Jan. 2014, updated May 2020

How to claim the tax credit, Feb. 2018, updated Jan. 2021

Guidance on the wood stove tax credit for 2022 and changes for 2023

July 2025 update: Congress revoked the wood heater tax credit as of Dec. 31, 2025. Expenses toward stoves and stove installations must be paid prior to Dec. 31, and the stove must be installed prior to Dec. 31.

The Inflation Reduction Act, signed into law in 2022, changed the tax credit for wood and pellet heaters to 30% with a cap of $2,000.  The efficiency qualification remained the same at 75% or more and it covered all associated costs of installation, stove pipe, etc. 

For more details about the 30% tax credit that becomes effective in 2023, see our 2-page overview here.

The tax guidance needed from the IRS remains the same: can a manufacturer simply, with little or no evidence, that their stove is eligible, or does it have to be third party tested and listed on the EPA database at 75% or above?  We urge all consumers to be safe and ensure they get a genuinely more efficient appliance by relying on efficiency listings in the EPA database.  This blog looks at how the tax credit has been interpreted in the past for solar panels and other technologies, as well as the intent of the lawmakers who wrote and passed the provisions.  The Alliance for Green Heat cannot give tax related advice and interested parties should always consult a tax professional.

Tax credit info for 2022

At the end of 2020, Congress passed an omnibus relief package (download  PDF version, page 2449) that included numerous provisions on renewable energy and energy efficiency.  Among those was the inclusion of biomass heaters in section 25(D) of the IRS tax code, the investment tax credit (ITC) that has applied to residential solar panels.  The technical term used in the omnibus bill is “qualified biomass fuel property expenditures” which is defined as “the burning of biomass fuel to heat a dwelling unit located in the United States and used as a residence by the taxpayer, or to heat water for use in such a dwelling unit, and which has a thermal efficiency rating of at least 75 percent (measured by the higher heating value of the fuel).”

Congress removed biomass stoves from section 25(C), which had provided a $300 tax credit up until December 31, 2020, to prevent a “double benefit,” or double dipping under two sections of the tax code.

The credit is set at 26% of the installed cost for 2021 and 2022, then drops down to 22% in 2023. It is set to disappear altogether in 2024 unless extended, which is common.  

Congressional intent

Much of the guidance the IRS is expected to issue about wood heaters is non-controversial and will likely to be consistent with solar.  There is one distinct issue that has plagued this industry in the past: how is 75% efficient at the higher heating value defined and how much leeway do manufacturers have to stretch the meaning?  Congress stipulated that it must be HHV, but the final language did not say that the EPA list of certified heaters is the definitive way to determine efficiency, although that is almost certainly what the IRS will allow. There is no other consistent, reliable way for retailers and consumers to know which heaters are actually 75% efficient or higher. 

Over the past 7 years, there have been a number of bills and extensive correspondence about strengthening the definition of 75% efficiency and moving wood heaters from section 25(C) to 25(D).  The only method that Congress has referred to is using the efficiencies on the EPA list of certified stoves.  No other method has been suggested. For instance, the Home Energy Savings Act of 2019 introduced by Senators Hassan and Collins, said:

“This section would tighten energy efficiency standards for biomass stoves by requiring the efficiency to be determined in reference to the EPA’s “List of EPA Certified Wood Stoves,” “List of EPA Certified Hydronic Heaters,” or “List of EPA Certified Forced-Air Furnaces.” Biomass stoves, through 2020, would be required to have a thermal efficiency rating of at least 73 percent against these tighter standards. After 2020, biomass stoves would be required to have a thermal efficiency rating of at least 75 percent against these tighter standards.” 

This language was crafted in conjunction with the Biomass Thermal Energy Council, the main architect of the language and the years-long advocacy process.  A final effort led by Innovative Natural Resource Solutions culminated in the residential portions of the BTU Act being included in this ominous spending package in December, 2020. The Alliance to Save Energy. the American Council for an Energy Efficient Economy, the Alliance for Green Heat and HPBA also agreed on parallel language that would have strengthened the efficiency criteria for an enlarged credit under 25(C) by referencing the EPA's database of certified wood and pellet heaters.

Until the IRS issues guidance, AGH urges retailers and consumers to rely on the EPA's database of certified heaters to ensure that the heater you install will be eligible for this credit.  Anyone who relies on claimed efficiencies in marketing materials should do so at their own risk and be prepared to forgo the tax credit if the stove is labeled under 75% efficient on the EPA list.

 

Updating IRS Form 5695

In 2022, taxpayers will need to fill out IRS Form 5695 to get the new, increased tax credit for installations in 2021.  Taxpayers will not need an updated Form 5695 until winter of 2022, when they fill out their 2021 taxes.  The current version of IRS Form 5695 is accurate for taking the $300 tax credit under section 25(C) for purchases made in 2019.

When the IRS updates a form, such as Form 5695, they issue an “early release draft” in advance, along with draft instructions.  For instance, you can see a previous early release draft for Form 5695 here, issued September 25, 2020, for changes they needed to make at that point.  This draft does not include the new 26% tax credit for wood heaters, which will appear in a draft released later in 2021.

 

What is included in the new tax credit?

The new tax credit is for the installed cost, including purchase price, sales tax, labor costs, and items necessary for installation, such as venting and floor protection.  The IRS is expected to provide more detail on items associated with installing wood heaters. In the meantime, consumers should retain receipts for all those expenditures.

Some stove  manufacturers issued
certificates for stoves under 65%
to claim eligibility for the $300
tax credit. 

AGH expects the IRS to update their current guidance later in 2021 to accommodate issues specific to high efficiency wood and pellet heaters. They may address, for instance, the cost of sweeping a chimney prior to installing a new heater eligible for the 26% tax credit, or the cost of upgrading floor and wall protection.  It is unclear if the IRS could bar manufacturers who issued an erroneous certificate claiming a stove was eligible for the $300 credit under 25(C) from issuing certificates for their stoves that would be eligible for the larger credit under 25(D).

Some issues are more complicated, such as how to calculate the tax credit when you also received a state rebate or tax incentive, or a rebate or discount from a wood stove change out program.  The tax credit should help change out programs offer even greater savings to consumers, and program managers will have to prepare to give advice on it.

This DOE publication on calculating the tax credit for solar panels is very instructive on the range of issues that will apply to installing high efficiency wood heaters.  For issues pertaining to stove manufacturers issuing certificates of eligibility, this blog provides more detail.

Much of the existing IRS guidance for solar panels, reproduced below, will likely to apply to wood heaters.  Text in italics are quotes from IRS guidance on the 25(d) tax credit.  

2019 IRS Q&A on Tax Credits for Section 25D 

Manufacturers Certification. “A taxpayer may rely on a manufacturer’s certification that property is eligible for the credit so long as the Service has not withdrawn the manufacturer’s right to make the certification. The notices further clarify that the Service may determine that a manufacturer’s certification is erroneous; in such cases, the Service will withdraw a manufacturer’s right to provide a certification on which future purchasers of the component or property may rely, and taxpayers purchasing the component or property after the date on which the Service publishes an announcement of the withdrawal may not rely on the manufacturer’s certification.”

Can a taxpayer claim the credits for expenditures incurred for a newly constructed home? 

“A taxpayer can claim the § 25D credit for qualifying expenditures incurred for either an existing home or a newly constructed home.” 

May a taxpayer claim the credits in the year of purchase if installation of the qualifying property occurs in a later year? 

“No. A taxpayer may not claim the credits until the year the property is installed.”

Are the credits available for improvements made to a second home (for example, a vacation home or an investment property)? 

“A taxpayer may claim a § 25D credit for other qualifying properties described in § 25D for solar electric property, solar water heating property, small wind energy property, and geothermal heat pump property installed in or on a dwelling unit used as a second home or a vacation home by the taxpayer. But a taxpayer may not claim the § 25D credit for expenditures for improvements made to an investment property, such as rental property, that is not also used as a residence by the taxpayer.” AGH expects guidance on wood heaters to be the same as these other technologies. 

May a taxpayer claim a credit if the qualified property is also used for business purposes, such as in a dwelling unit in which the taxpayer also conducts a business? 

“For 25D, if a taxpayer uses property solely for business purposes, the property will not qualify for the credit. For a taxpayer who otherwise qualifies for the credits, but whose use of the qualified property for business purposes exceeds 20 percent, §§ 25C(e)(1) and 25D(e)(7) provide that the taxpayer, when calculating the amount of credit, may take into account only that portion of the expenditures for the property that are properly allocable to use for nonbusiness purposes. A taxpayer who qualifies for the credits and whose use of the qualified property for business purposes is not more than 20 percent may claim the full credit.” 

May a taxpayer include labor costs when calculating the credits? 

“When calculating the § 25D credit, a taxpayer may include the expenditures for labor costs properly allocable to the onsite preparation, assembly, or original installation of the qualified property and for piping or wiring to interconnect the qualifying property to the home.” 

May a taxpayer include sales tax when calculating the amount of expenditures eligible for the credits? 

“Generally, yes. Because the sales tax on a qualifying property is part of the amount paid or incurred, a taxpayer may include the amount of sales tax when calculating both the § 25D credit.” 

If a government or a public utility provides a subsidy (for example, an incentive, grant, or rebate) to a taxpayer to purchase or install a qualifying property under § 25C or § 25D, is the taxpayer required to reduce the cost basis of the property by the amount of the subsidy received, thereby reducing the amount of the qualified expenditure for which a credit may be claimed? 

“Rebates generally represent a reduction in the purchase price or cost of property, and the taxpayer must exclude the amount of the rebate from the amount of the qualified expenditure on which the taxpayer calculates the tax credit. In general, in order for a receipt of funds to be considered a nontaxable rebate, the rebate must be based on or related to the cost of the property; the rebate must be received from someone having a reasonable nexus to the sale of the property, for example, the manufacturer, distributor, or seller/installer; and the rebate must not represent payment or compensation for services. 

Generally, a taxpayer is not required to reduce the purchase price or cost of property acquired with a governmental energy-efficiency incentive that is not a rebate. Many states label their energy-efficiency incentives as rebates, but these incentives may not in fact constitute rebates or purchase-price adjustments for federal income tax purposes.” 

“The taxpayer does not reduce the amount of the qualified expenditure by the amount of the state tax credit claimed in calculating the credits.” 

If a taxpayer finances the purchase of a qualifying property under § 25C or § 25D through the seller of the property, may the taxpayer calculate the amount of the credit based on the full cost of the property if the taxpayer is contractually obligated to pay that entire amount? 

“Yes. If the taxpayer is contractually obligated to pay the full cost of the qualifying property, the taxpayer may claim a tax credit based on that amount.” 

May a taxpayer claim a credit for payments of interest owed through financing or for expenses such as an origination fee or an extended warranty? 

“No. Interest expense is not part of the expenditure for qualifying property under § 25C or § 25D. Other miscellaneous costs such as an origination fee or an amount paid for an extended warranty are also ineligible for the credits.” 

May a taxpayer claim a credit for property that the taxpayer leases rather than purchases? 

“No. A taxpayer must purchase the qualifying property to claim the credits under §§ 25C and 25D.” 

May a taxpayer claim the credits when the taxpayer does not have a manufacturer’s certification that the property is eligible for the credit? 

“Yes. A taxpayer may qualify for the credits under §§ 25C and 25D without a manufacturer's certification statement if the taxpayer can show that the property meets the required efficiency standards. A taxpayer should retain documentation sufficient to establish the entitlement to, and amount of, any credit.” 

Is an expenditure for a solar air heater eligible for the § 25D credit? 

No. Section 25D(d)(2) defines a qualified solar electric property expenditure, in part, as an expenditure for property that uses solar energy to generate electricity for use in a dwelling unit. Section 25D(d)(1) defines a qualified solar water heating property expenditure, in part, as an expenditure for property to heat water for use in a dwelling unit if at least half of the energy used by such property for such purpose is derived from the sun. A solar air heater that warms air and does not generate electricity or heat water is not eligible for the § 25D credit. 

Is a manufacturer of geothermal heat pump property that provides a certification pursuant to Notice 2009-41 required to become an Energy Star partner? 

No. A manufacturer of geothermal heat pump property is not required to become an Energy Star partner to provide a certification pursuant to Notice 2009-41. However, the geothermal heat pump property must meet the requirements of the Energy Star program in effect at the time the taxpayer purchases the property. Furthermore, any manufacturer that provides a certification must retain in its records documentation establishing that the property meets those requirements and, upon request, make such documentation available for inspection by the Service.