In the beginning of April, the U.S. Senate Finance Committee voted to include the Residential Energy Efficiency (25C) Tax Credit in a tax extension package of 50+ tax breaks. This provision, which expired on December 31, 2013, includes a tax credit for biomass-fueled stoves that would be applicable for qualifying appliance purchased between January 1, 2014 and December 31, 2015.
What is going on now?
In the Senate. The tax extenders are expected to be discussed on the Senate floor in May or June of this year. One piece of legislation, known as the Expiring Provisions Improvement Reform and Efficiency Act (the EXPIRE Act), has been assigned the bill number S. 2260. The EXPIRE Act would extend the 25C tax credit for 75 percent efficient biomass-fueled stoves to December 31, 2015 and apply retroactively to any qualifying appliances purchased since December 31, 2013.
Another bill in the Senate, S. 1859, known as the Tax Extenders Act of 2013, was introduced by Senator Harry Reid in late December 2013. The bill extends the 25C tax credit for 75 percent efficient biomass-fueled stoves to December 31, 2014 and applies retroactively to any qualifying appliances purchased since December 31, 2013.
In the House. Each of the 50+ tax breaks in the EXPIRE Act are being discussed individually by the House Ways and Means Committee. Another bill that references the 25C tax credit extension is H.R. 3950. This legislation, like the Tax Extenders Act of 2013 in the Senate, will only extend the 25C tax credit for 75 percent efficient biomass-fueled stoves to December 31, 2014 and apply retroactively to any qualifying appliance purchased since December 31, 2013.
A federal tax credit on 75 percent efficient biomass heating appliances, which expired on December 31, 2011, was reinstated by the “fiscal cliff” legislation, the American Taxpayer Relief Act of 2012 (H.R. 8), signed by President Obama on January 2, 2013. The bill includes a “tax extender” for Internal Revenue Service Section 25C which provides a tax credit for, among many other things, qualifying biomass burning stoves. The extender provides a dollar-for-dollar tax credit of up to $300 on a qualifying biomass heating appliance purchased between January 1, 2012 and December 31, 2013. The credit claimable on the purchase or installation of qualifying biomass units is limited to a “lifetime limit” of $500 (and may be impacted by the purchase or installation of other products that qualify of a 25C credit).
How to Claim this Tax Credit
The credit for tax year 2013 is claimed on IRS Form 5695. The biomass tax credit can be claimed on line 22a of the form. More detailed instructions regarding completion of this section can be found on the last page of IRS Form 5695 at the bottom of the first column. Please contact us if you have any questions about completing this form or requirements for claiming the tax credit. HPBA recommends all individuals consult with their tax adviser for details on the applicability of the tax credit.
HISTORY OF AND BACKGROUND ON THE BIOMASS STOVE TAX CREDIT
2008 – Congress amended the 25C tax credit for residential energy property expenditures (which had been in place for purchases made after January 1, 2006) to include “qualified biomass fuel property,” authorizing a tax credit on the amount of residential energy property expenditures paid or incurred by the taxpayer during the 2007 and 2008 tax year – up to $300 for consumers who purchased a 75% efficient stove “which uses the burning of biomass fuel to heat a dwelling unit…or to heat hot water for use in such a dwelling unit.” A definition of biomass fuel was also included in the language of the bill. The tax credit was subject to a $500 “lifetime limit.”
2009 – In early 2009, the new Obama Administration and the new 111th Congress proposed the massive stimulus package, The American Recovery and Reinvestment Act (ARRA) of 2009. Working with our allies in the Congress, HPBA was able to get language inserted into the ARRA draft language that expanded the 2008-passed tax credit to become a 2-year credit with the same requirements (75% efficiency), but with a much-increased value for the tax credit (30%, up to $1500). Lastly, and very importantly, HPBA was able to get language inserted that requires the use of “a thermal efficiency rating of at least 75% as measured using a lower heating value.” The LHV language was key to ensuring that the biomass-burning stove tax credit would be a success.
2010/2011 – The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act TRUIRJCA of 2010, passed at the end of 2010, took the numbers of the biomass-burning stove tax credit back to its pre-2009 levels:
In the weeks leading up to Congress' vote on the tax package, HPBA reached out to congressional leaders to remind them of the importance of this tax credit not only to the hearth industry but to consumers interested in purchasing biomass heating systems. HPBA had been working closely with Senator Susan Collins (R-ME) to ensure that biomass tax credit language was contained in the bill, and we are appreciative of the efforts she put forth in achieving its inclusion. Of particular note is Sen. Collins’ inclusion of language in the Congressional Record (the official transcript of the United States Congress) that directs the IRS to continue to use the lower heating value as the operative efficiency methodology in determining which appliance qualifies for the tax credit. A portion of her remarks stated:
"The IRS has issued guidance directing that the 'lower heating value' methodology should be used, which is consistent with industry practices and with our intent to ensure that the credit is available for efficient and clean-burning wood and wood-pellet stoves. Removing the reference to the 'lower heating value' from the Code serves little purpose. Certainly, however, it does not mean that this common-sense methodology is precluded, nor does it require the IRS to revisit its methodology. I hope that my comments today will help avoid confusion about the use of the 'lower heating value' methodology with respect to this tax credit."
(Congressional Record, December 15, 2010; Statement by Senator Susan M. Collins; H.R. 4853, Middle Class Tax Relief Act of 2010)
Comments place in the Congressional Record have no authority to direct or alter regulations or legislation, but they do have the power to suggest how bureaucrats might want to interpret congressional actions. With this in mind, and without any absolute indication to the contrary, HPBA is continuing to suggest that the 75% efficiency level still applies. And, although the very important LHV measurement language has been deleted, we believe (but do not yet know for certain) that the IRS will continue to follow the precedent set by the prior tax credit and allow the use of the LHV measurement to determine efficiency. We are in the process of asking the committees of jurisdiction in the new 112th Congress for a more detailed explanation of why LHV was removed from the tax code, and what we can do to get it permanently returned to the code.
2013 – On January 2, 2013, President Obama signed the American Taxpayer Relief Act of 2012 (H.R.8) which extended the 2011 tax credit of $300 retroactively to the beginning of 2012 and through the end of 2013 (subject to the lifetime limit of $500 on qualifying products).
Lifetime Limitation – The tax code is famous for its “lifetime limitation” language and this tax credit is no different. As with historical tax credits available to the industry, rather than attempting to explain the complicated details of lifetime limitations, HPBA prefers to say, "PLEASE CONSULT YOUR TAX ADVISOR FOR DETAILS OF HOW THIS WILL AFFECT YOU" in all of our comments, both written and oral, about this credit.
Tax Credit FAQs
What is the Biomass-Burning Stove Tax Credit?
This federal tax credit encourages people to make energy-conscious purchases that improve the energy efficiency of their home. It is an up to $300 credit you can get for buying a qualifying biomass-burning stove or fireplace insert between January 1, 2012 and December 31, 2013. Biomass simply means the stove uses wood or pellet fuel.
Consumers claim the credit on their federal income tax form at the end of the year. This new credit reduces the amount of tax you owe. The new credit is a reduction of total income tax at the bottom of your return, up to $300. This tax credit is a non-refundable tax credit available for individuals who pay taxes and who make energy-conscious purchases to improve the energy efficiency of their home.
Note: With regard to tax credits vs. tax deductions, in general, a tax credit is more valuable than a similar tax deduction. A tax credit reduces the tax you pay, dollar-for-dollar. Tax deductions - such as those for home mortgages and charitable giving - lower your taxable income.
What is the difference between a tax deduction and a tax credit?
As previously stated, a deduction is an expense or amount you can subtract from your taxable income. A tax credit lowers your actual tax bill dollar-for-dollar, in this case by up to $300. In general, a tax credit is more valuable than a similar tax deduction.
What is the difference between a non-refundable tax credit and refundable tax credit?
A non-refundable tax credit (such as this one) is a tax credit that is applied to the amount of tax owed by the taxpayer after all deductions are made from his or her taxable income. Typically, a tax credit only reduces an individual's tax liability to zero. Refundable credits can be considered the same as a payment, with no limit to the amount a taxpayer can receive. A refundable tax credit is a tax credit that is not limited by the amount of an individual's tax liability.
When does this tax credit go into effect and how long will it last?
The tax credit for qualifying biomass stoves went into effect January 1, 2007 and is valid only for the purchase of a qualifying biomass stove during and has been extended and amended (periodically) through December 31, 2013. The maximum lifetime limit for the tax credit (for all residential energy property expenditures) is $300. The sales receipt must indicate a covered date of purchase.
How is the value of this tax credit determined?
When you buy a qualifying biomass-burning appliance, you get a dollar-for-dollar tax credit of up to $300.
What appliances qualify for the tax credit?
Any wood- or pellet-burning stove that meets the 75% efficiency rating qualifies for this credit.
Manufacturers test their products to certify they meet this efficiency standard and the IRS-required certification will come with the product straight from the appliance manufacturer. Visit your local specialty retailer who can explain which products they have will qualify for the tax credit.
Why was 75% efficiency selected?
The 75% efficiency was designated by the U.S. Congress in 2005 as part of the Energy Policy Act and was used again for this tax credit.
How is the 75% efficiency requirement determined?
The manufacturer of the stove must provide certification that the product tests for at least a 75% efficiency rating using the lower heating value, i.e., the heat value of a combustion process assuming that none of the water vapor resulting from the process is condensed out, so that its latent heat is not available.
Are biomass stoves installed in new or vacation homes covered by this tax credit?
No. The credit only applies to your existing principal residence. New homes and vacation homes don't qualify, nor do homes owned as rental units. The IRS is very clear that this credit applies only to existing principal residences, thus new homes and vacation homes would not qualify, nor would homes owned as rental units.
What is meant by "renewable biomass?"
For the purposes of this tax credit, the term 'renewable biomass' means any of the following:
(A) Materials, pre-commercial thinnings, or removed invasive species from National Forest System land and public lands, including those that are byproducts of preventive treatments (such as trees, wood, brush, thinnings, chips, and slash), that are removed as part of a federally recognized timber sale, or that are removed to reduce hazardous fuels, to reduce or contain disease or insect infestation, or to restore ecosystem health, and that are harvested in environmentally sustainable quantities, as determined by the appropriate federal land manager; and harvested in accordance with federal and state law, and applicable land management plans.
(B) Any organic matter that is available on a renewable or recurring basis from non-federal land or land belonging to an Indian or Indian Tribe that is held in trust by the United States, including renewable plant material like feed grains; other agricultural commodities; other plants and trees; and algae; and waste material, including crop residue; other vegetative waste material (including wood waste and wood residues); animal waste and byproducts (including fats, oils, greases, and manure); construction waste; and food waste and yard waste.
(C) Residues and byproducts from wood, pulp, or paper products facilities.
What is the definition of a "Wood Burning Furnace?"
A wood burning furnace is a simply a furnace type that uses wood as its primary fuel source. In some cases, a wood furnace can simply use radiant heat in order to control environmental conditions in the home, or it can be a forced-air furnace. Forced-air furnaces force air into the furnace, heat it up, and then force the heated air into the ducts for distribution throughout the home. This is also known as central heating. In a sense, a fireplace can also be considered a wood burning furnace.
Will other wood and solid-fuel appliances (like inserts, EPA-certified wood-burning fireplaces and hydronic heaters) qualify for the tax credit?
The IRS did not state that inserts are covered, or are not covered. However, based on EPA's practice of treating inserts and freestanding biomass stoves in a similar fashion, manufacturers may choose to include inserts. At this time (February 2013), it is not clear whether EPA-certified wood-burning fireplaces or hydronic heaters will qualify.
If a consumer purchases other products, such as solar collectors or window upgrades, does this mean a biomass stove tax credit can't be taken?
The tax credit is an aggregate, meaning the %500 total credit can be used for items other than biomass stoves, such as windows and doors, HVAC and non-solar water heater upgrades, and roof upgrades, all of which are in the same tax credit category as biomass stoves. The tax credit for all of these upgrades is capped at $500 for expenditures made after December 31, 2005.
How do I ensure that I can collect on my tax credit?
Save your receipt that proves you purchased the qualifying appliance between January 1, 2012 and December 31, 2013. You'll also need a manufacturer's certification statement that states your product meets the 75% efficiency rating needed to qualify for this tax credit.
A manufacturer's certification statement must contain the following information:
These documents don't need to be attached to your tax return, but you should keep them for your records.
What should a retailer provide and the customer retain for tax purposes?
Retailers and consumers must keep exact records of any sale or purchase. Retailers should provide a consumer with the manufacturer's certification statement for the specific product model purchased. A consumer may rely on a manufacturer's certification statement that their products are qualified energy property. A taxpayer is not required to attach the certification statement to the return on which the credit is claimed. A consumer claiming a credit for qualified energy property should retain the certification statement as part of the taxpayer's records. Manufacturers should make this certification document available to consumers on the web, in the product packaging, or in some other easily accessible manner.
Are installation costs included in this tax credit?
Yes. Installation costs are included as long as professional installation is required for the proper and safe operation of the stove. The IRS is silent on the possible need to replace a chimney when upgrading an existing biomass stove; however, the EPA has a section on its website titled, Installation Affects Efficiency, which retailers and consumers should consult when deciding if a chimney replacement is warranted when installing a biomass stove.
Does the stove need to be manufactured in the U.S. to qualify for the credit?
No. There is no "Buy America" component to this tax credit.
Where can I find more information about this tax credit?
More information on the tax credit can be found here.