Guidance on the Tax Credit for High-Efficiency Wood Heaters

At the end of 2020, Congress passed an omnibus relief package 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.
By John Ackerly | February 07, 2021

At the end of 2020, Congress passed an omnibus relief package 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 Dec. 31, 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. 

Much of the guidance the IRS is expected to issue about wood heaters is noncontroversial and will likely be consistent with solar. But 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 seven 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 Sens. 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. American Council for an Energy Efficient Economy, 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.

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.

 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. 

AFGH expects the IRS to update 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. 

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.

Contract: John Ackerly
President, Alliance for Green Heat
jackerly@forgreenheat.org
www.forgreenheat.org