Attorneys for AGH have facilitated numerous phone calls and correspondence between AGH and the IRS staff who write guidance for Section 25D of the US tax code that provides tax credits for residential renewable energy property. This summarizes our communications with IRS attorneys and staff.
The Alliance for Green Heat (AGH) strongly urges the IRS to issue guidance on which wood and pellet heaters are eligible for the new 26% ITC tax in Section 25D. Congress added “qualified biomass fuel property expenditures” to section 25D. Just as with Section 25C, this include stoves, boilers and furnaces that use biomass as fuel. (Ninety-nine percent of biomass heaters use wood or wood pellets, but corn or wood chips could be used as well.)
Modern wood and pellet heaters are an important part of the array of renewable technologies we need to combat climate change. This tax credit is an important policy tool to help taxpayers reduce their fossil heating fuel usage with a renewable fuel. By targeting wood and pellet heaters that are at least 75% efficient, Congress is helping taxpayers afford the more expensive and cleaner heaters. Congress is also benefitting those stove manufacturers who invested in the R&D to make more efficient heaters and encouraging all manufacturers to reach higher efficiency levels in the future.
Your guidance can be very simple: to be eligible for the 25D tax credit, wood and pellet heaters (e.g. qualified biomass fuel property expenditures) must have an efficiency of 75% or higher on the EPA-Certified Wood Stove Database.
You may want to also add that manufacturers cannot issue certificates of eligibility unless their heater is rated at 75% efficient or higher on the EPA-Certified Wood Stove Database. Instead of taxpayers keeping manufacturers certificates of eligibility in their files, they could simply rely on the EPA database.
We urge the IRS to act quickly on this because the tax credit is already in effect and manufacturers, retailers and consumers need to be sure which heaters qualify. While we believe the plain meaning of the credit already is clear and that the EPA database is the obvious, authoritative resource, significant abuse of the credit is likely unless you issue timely guidance.
To be eligible the biomass fuel property, Congress stated that heaters must have “a thermal efficiency rating of at least 75 percent (measured by the higher heating value of the fuel).” The IRS should provide guidance that the EPA Certified Wood Stove Database is the way to determine which heaters are at least 75% efficient. Note that the EPA maintains a data for room heaters (stoves) and for central heaters (boilers and furnaces). Both of these databases use the higher heat value to measure efficiency and every EPA certified heater has a verified efficiency from an EPA approved third party test lab.
The column in the EPA database is titled “Overall Efficiency” which they define as “the percentage of heat that is transferred to the space to be heated when a load of fuel (e.g., firewood, pellets) is burned.” Thus it is clear that their use of “overall efficiency” refers to thermal efficiency, as used by the US Congress.
There is no other consistent, reliable and transparent way for stakeholders to determine the efficiency of qualified biomass fuel property other than using the efficiency listings on the EPA Certified Wood Heater Database. Allowing manufacturers to issue certificates of eligibility based on cherry-picking the highest efficiency of one burn rate, rather than using the average of all the burn rates does not conform to the plain meaning of Congress’s intention. If Congress wanted virtually all wood and pellet stoves and boilers to qualify, it could have either removed any reference to efficiency, or specifically said that the efficiency of any burn rate or test would qualify. Note that Congress also did not specify that efficiency numbers had to come from a third party, EPA approved test lab during a certification test. Thus, a clever industry lawyer could argue, that in addition to choosing the highest efficiency number from any burn rate, they could also use their own test labs to determine efficiency or use a test from third party lab that was not part of a certification test.
Unfortunately, the wood and pellet stove industry has a track record of subverting the plain language that Congress has used when it defined which stoves should be eligible for the previous, $300 tax credit under section 25C. Up until Jan. 1, 2021, when wood and pellet heaters were under Section 25C manufacturers could use the lower heating value, but more importantly, they did not have to disclose the efficiency of the stove at all, or to disclose whether it was from a third-party lab or their own lab. Thus, virtually every single wood and pellet heater qualified for the Section 25C tax credit. AGH wrote many blogs about this problem, and how manufacturers were able to take advantage of this tax credit and mislead consumers into thinking they were buying stoves at 75% efficiency or higher.
We do not recommend that taxpayers rely on a certificate from the manufacturer, unless the IRS states that a manufacturer can only issue a certificate if it is consistent with the efficiency listing on the EPA database of certified stoves.
In addition, your guidance could state that in order to eligible for the 25D tax credit, the biomass fuel property must be EPA certified and appear on the Database of EPA Certified stoves. All residential heaters on the market today are supposed to be certified by the EPA. Fireplaces and chimeneas are not considered be residential heaters, thus they are not covered by EPA regulations. Typically, they also do not have or advertise thermal efficiency values. But there is always some company that will try to get their uncertified product eligible for the credit unless the IRS makes it clear what can be eligible.
Various sectors of the wood heating industry may urge you to use a different definition of 75%. Currently, the website of the Hearth, Patio and Barbecue Association (HPBA) says that pending the expected IRS guidance, “the EPA certified wood heater database may be referenced.” The Alliance for Green Heat worked with HPBA from 2017 through 2020 and they had been in agreement that the EPA database should be used to determine efficiency. However, we understand that the Association’s Solid Fuel Section no longer has consensus on a position, and the Association is no longer able to take a position at this time. We understand that some leading companies believe that they can claim eligibility if any single burn rate was 75% or greater, instead of using the average of the burn rates. This could result in an overwhelming majority of stoves being declared eligible. Currently, about 45% of all wood and pellet stoves, boilers and furnaces would be eligible, based on the EPA list.
The only class of heater that has a good claim to high efficiency but cannot readily take advantage of this tax credit are masonry heaters. Masonry heaters are currently exempt from EPA emission standards and thus do not have a pathway to measure and report emissions or efficiency. While many masonry heater models are indisputable 75% efficient or higher, there is not a consistent, transparent way to compare them and find their efficiency, as there is with EPA certified stoves and boilers.
According to the DOE website masonry heaters "produce more heat and less pollution than any other wood- or pellet-burning appliance." The EPA website say Masonry heaters are typically very efficient heaters, and currently do not require EPA certification. If the IRS is interested in finding a way to make masonry heaters eligible, I would encourage you to contact the Masonry Heater Association. The Alliance for Green Heat is also available to provide you further detail about this uniquely clean and efficient class of wood heaters.
Congressional intent
AGH wrote a blog that looked at Congressional intent and noted that previous iterations of Congressional legislation included more detail. For instance, For instance, the Home Energy Savings Act of 2019 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 developed for Congress by a consortium of energy efficiency and other groups, including the Alliance to Save Energy, the ACEEE, our organization, HPBA and many others. This language turns up often in memos from this consortium to Congress, including this one on May 1, 2019. If you scroll to the very bottom of the last page of that memo, you will find the suggested language for biomass heaters.
Biomass stove - Thermal efficiency of at least 75 percent. Product category cap of $300.
o Proposed: Thermal efficiency of at least 73 percent higher heating value through 2020 – and 75 percent higher heating value after 2020 – as reported by the EPA on the "List of EPA Certified Wood Stoves" or “List of EPA Certified Hydronic Heaters” or “List of EPA Certified Forced-Air Furnaces.” Product category incentive cap raised to $400.
Also please find attached an earlier memo signed by energy efficiency organization urging the IRS to use the North American higher heating value and the average efficiency.
Please do not hesitate to contact me if I can be of further assistance. I can be reached at 202-365-4765.
Sincerely,
John Ackerly,
President
