AGH urges IRS guidance to recognize efficiencies in the EPA Database

 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

 

 

 

How to claim the $300 stove tax credit

Updated on Jan. 6, 2020 - Legislation just became law that provides a 26% tax credit for wood heaters, and ends the traditional $300 credit. Qualifying stoves purchased in 2020 can still receive the $300 tax credit by filling out IRS Form 5695.  Form 5695 will also used in 2022 to file 2021 taxes, where taxpayers can take the 26% credit if they purchased an eligible heater. 

Taxpayers purchasing eligible stoves in 2020 can still take the $300 tax credit on their 2020 taxes. To be eligible for the $300 tax credit, stoves or boilers need to have a 75% "thermal efficiency rating" or greater and be purchased in 2018, 2019 or 2020.

To claim the credit for 2019 and 2020 complete IRS Form 5695 when you file your taxes.  Wood and pellet heaters are covered under Nonbusiness Energy Property Credit on line 22A.  Do not include more than $300 on line 22A.  According to the IRS, your stove must have "a thermal efficiency rating of at least 75%" to take the $300 credit.  Any thermal efficiency ratings less than that would enter "0" on line 22A, and the taxpayer may not need to file Form 5695 at all unless they installed other eligible energy efficiency property in 2019.  Instructions for Form 5695, with other important qualifications, are here.  Online service such as Turbotax and Intuit have Form 5695 integrated into their software.

Taxpayers do not have submit receipts with their taxes but need to maintain receipts in their files. The EPA database provides verification of whether a stove is 75% efficient and is the only reliable place for consumers to determine efficiency numbers. If the EPA database provides an efficiency of less than 75% for a particular stove, it may not be eligible for the tax credit.

The EPA database is easily searchable
to find efficiency and emission ratings.

Unfortunately, many manufacturers are issuing certificates of eligibility for stoves that are far less than 75% efficient. For IRS purposes, consumers are allowed to rely on the manufacturers certificate, even if the stove is listed far below 75%.  However, if you want a higher efficiency stove, which is particularly important if you are in the market for a pellet stoves, first refer to the EPA database.

One retailer inaccurately advertised that "because this [64% efficient] model was EPA approved, it qualifies for the tax credit." Major manufacturers such as Drolet, Enviro, Harman, Jotul, Quadrafire, all claim stoves far below 75% (LHV or HHV) are eligible. V.P Berger, the President of Hearth & Home Technologies (HHT) that owns Harman and Quadrafire signed a manufacturers certificate claiming the Harman XXV pellet stove, at 66% efficiency and the Quadrafire Classic Bay pelet stove at 64% efficient were eligible.  Mr. Berger and others at HHT did not respond to calls or emails.   Even one pellet stove that is listed at 59% efficient is claimed to be eligible. 

If the IRS determines that a manufacturer's certificate is erroneous, the IRS can "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.”  

These 2020 manufacturer certificates

all claim stoves under 67% efficiency

are eligible for the IRS tax credit and

are signed under penalty of perjury.

Two companies, U.S. Stove and England Stove Works, that dominate the market for lower cost and often lower efficiency stoves, stopped issuing certificates of eligibity for any of their stoves as of 2020.  If they had adopted the questionable and unexplained efficiency calculations of many of the big name brand manufacturers, they could have allowed thousands of consumers to claim the credit on their lines of stoves.  Both U.S. Stove and England Stove Works have eligible stoves that are over 75% efficiency (HHV), with England Stove Works getting three of their 2020 compliant pellet stoves between 76 and 79% efficiency, higher than the pellet stove efficiencies of bigger name brand stoves.

The Hearth, Patio and Barbecue Association (HPBA) would not take a position on loopholes used by manufacturers to qualify stoves that are in the low to mid 60s efficiency range.  AGH urged HPBA to advise manufacturers not to mislead consumers or the IRS.

There is a $500 limit is a lifetime limit for all energy efficiency property, including insulation, doors, windows or other wood or pellet stoves. So, if a taxpayer has claimed $300 in previous years, for example, they may only be able to claim $200 on their taxes for a qualifying stove.  The tax credit also applies to wood and pellet boilers and furnaces.   

Other heating and cooling equipment had far stricter qualification standards to ensure that consumers got a tax credit for a genuinely more efficient appliance or item.  

The 2014 tax break cost taxpayers about $42 billion.  The tax credit for stoves alone is not likely to cost more than $50 million and that’s if a majority of people who bought stoves learn about the credit and take it on their tax return.