The Residential Energy Efficient Property (REEP) Credit was renamed the “Residential Clean Energy Credit” by the Inflation Reduction Act, has been extended an additional 11 years. It is now set to expire on January 1, 2035.
The Residential Clean Energy Credit is often referred to as the Solar Energy Credit, although it also applies to qualified fuel cell property, qualified small wind energy property, geothermal heat pump property, and biomass stove and water heater property.
The Inflation Reduction Act also adds qualified battery storage technology expenditures to the list of qualified expenditures eligible for the credit, applicable to expenditures made after December 31, 2022.
30% Credit Retroactively Reinstated
The Inflation Reduction Act has retroactively reinstated the full 30% credit for properties placed in service after 2021. Previously, the amount of the credit was phased down to 26% for solar energy property placed in service in 2021 and 2022 and was scheduled to be further reduced to 22% if the property was placed in service in 2023. The full 30% credit is now available for eligible expenditures through the end of 2032. The credit will be phased down to 26% in 2033 and to 22% in 2034.
Principal Residence Requirement
Except for fuel cell property, each type of property eligible for the IRC §25D Residential Clean Energy Credit can be claimed for property installed on any personal use residence, even if it is not the taxpayer’s principal residence. However, fuel cell property must be installed on the taxpayer’s principal residence.
Labor and Related Installation Costs
Labor and installation costs allocable to the onsite preparation, assembly, or original installation of the qualified solar electric property, and for piping or wiring needed to connect to the residence can be considered in computing the credit.
Notably, the credit cannot be claimed for:
- Financing costs, including interest and origination fees.
- Extended warranty costs; or
- Roof repairs and replacements.
Timing of Expenditures
All expenditures qualifying for the Residential Clean Energy Credit are considered made when the original installation of the property is completed. This is significant for taxpayers undertaking solar projects toward the end of a tax year. If the project is not completed before December 31, then the taxpayer must wait another tax year to claim the credit.
Understanding Residential Clean Energy Credit is essential for effective tax planning in the upcoming year. Every tax situation is different. For case specific questions, tax planning strategies, or more information on clean energy credit, contact the experienced tax professionals at Chugh, LLP.
