NEW Wood and Pellet Heater Investment Tax Credit (ITC)

DOWNLOAD NEW CONSUMER ONE-PAGER


JANUARY 11, 2021 UPDATE: A spending legislation and pandemic relief package was signed into law at the very end of December and included a long sought-after tax credit for wood and pellet heaters. These systems, whether they are stoves purchased to heat space or larger, whole home heating systems, will now qualify for a renewable energy investment tax credit (Section 25(D) of the Internal Revenue Code). Up until now, only solar, small wind, fuel cell, and geothermal systems qualified for this credit. 

Beginning in 2021, consumers buying highly efficient wood or pellet stoves or larger residential biomass heating systems will be able to claim a 26% tax credit that is uncapped and based on the full cost (purchase and installation) of the unit. The credit will remain at 26% through this year and next, and then step down to 22 percent in 2023. This provision is part of the BTU Act, which has been actively supported by HPBA for the last several years and has been part of our Advocacy Day requests to Members of Congress. 

NOTE: The language that made it into the final spending package eliminates the Sec. 25(C) credit for biomass stoves. The Sec. 25(C) tax credit may still be claimed on your 2020 tax return for qualifying purchases and installations completed before December 31, 2020.

Please contact Rachel Feinstein if you have any questions. 


What is this new tax credit?

  • Effective Dates: The new tax credit under Sec. 25(D) of the U.S. Internal Revenue Code (“IRC” or “tax code”) came into effect on January 1, 2021 for qualifying purchases and installations completed on or after that date, through December 31, 2023
  • Credit Amount: Creates a new tax credit of 26 percent of the purchase and installation costs (with no cap or lifetime limit) for tax years 2021 and 2022; moves down to 22 percent of purchase and installation costs in 2023 (under Sec. 25D of the U.S. tax code)
  • Qualifying Products: Require qualifying products (any biomass-fueled heater) must have a thermal efficiency of at least 75 percent efficient per the higher heating value (HHV) of the fuel

What happens to the 25(C) tax credit?

  • Eliminates the tax credit for biomass stoves under IRC Sec. 25(C) starting in 2021 and enacts this provision in its place
  • Any product purchased in 2020 that qualifies for the new Sec. 25(D) credit, but isn't installed until 2021, can be claimed under the Sec. 25(D) credit on a 2021 tax return. Products must be claimed on the tax return year in which the product installation is complete. 

See our new FAQs about this new tax credit for additional information.

HPBA will continue to update this page with additional information and new materials as we learn more. Please contact Rachel Feinstein if you have any questions. 

    IRS Biomass Stove Tax Credit Related Guidance

    Over the years, the IRS has issued a few guidance documents with content related to the biomass stove (Sec. 25C) tax credit. While our FAQs listed below are a good place to start, we strongly encourage you to review the IRS guidance documents linked below. 


    IRS 2013 GUIDANCE

    (See pages 2-9)

    Updates previous guidance document with changes made by additional authorizing legislation. Includes a more in-depth FAQ section.


    IRS Notice 2009-53 Guidance

    (See pages 5 and 12-17)

    Provides procedures that manufacturers may follow to certify property as either eligible building envelope components or qualified energy property. Biomass stoves are considered “qualified energy property. The guidance document also provides conditions under which taxpayers seeking to claim the credit may rely on a manufacturer’s certification.

      Wood and Pellet Heater ITC FAQs

      I don't see the new tax credit reflected on the IRS website. Is this tax credit the real deal?

      Yes. 

      You can find the mention of the new Sec. 25(D) tax credit on page 4,916 (PDF page 2,449) of this document: https://docs.house.gov/billsthisweek/20201221/BILLS-116HR133SA-RCP-116-68.pdf

      This bill passed and was enacted.

      Combined with the existing 25(D) language (the dates of the existing language were also changed by the recent legislation), that creates the 26% credit for wood and pellet heaters.

      Existing 25(D) language: https://www.law.cornell.edu/uscode/text/26/25D

      What must a manufacturer's certification statement contain?

      A manufacturer's certification statement must contain the following information: 

      • The name and address of the manufacturer.
      • Identification of the class of qualified energy property (Biomass-Burning Stove) in which the property is included.
      • The make, model number and any other appropriate identifiers of the stove.
      • A statement that the product is an eligible qualified energy property.
      • A manufacturer's certification statement must contain a declaration, signed by a person currently authorized to bind the manufacturer in these matters, in the following form: "Under penalties of perjury, I declare that I have examined this certification statement, and to the best of my knowledge and belief, the facts are true, correct, and complete."

      Do I need a manufacturer's certification statement to claim this credit?

      No, you are not required to have a manufacturer's certification statement to claim the credit. But, it is good to have if it is available. In the absence of a manufacturer's certification statement, we recommend you print out or save the appliance manual section that mentions the efficiency rating, or take a screenshot of its listing on EPA's website. 

      If someone claimed the old 25(C) tax credit in past years, but they make a purchase and installation in 2021 or later that qualifies for this new credit, can they claim the new credit on future tax returns?

      Yes. This is a completely new tax credit not limited by the previous restrictions of Sec. 25(C). Further, there is no cap or limit on this credit.

      What happened to the old Sec. 25(C) tax credit of $300?

      The language enacted at the end of 2020 eliminated the Sec. 25(C) tax credit of $300, starting in 2021. If you made a purchase and installation in 2020 that qualifies for the now-expired credit, you can still claim the credit on your 2020 tax return.

      The new Sec. 25(D) tax credit is not retroactive. It can only be claimed on 2021 (and beyond) tax returns.

      The tax credit can only be claimed on the tax return year in which product installation is complete.

      What is the Wood and Pellet Heater Investment Tax Credit? What products qualify?

      The Wood and Pellet ITC was created by legislation enacted by Congress at the end of 2020. It creates a new credit under Sec. 25(D) of the Internal Revenue Code. The credit covers 26 percent of purchase and installation costs in 2021 and 2022 and covers 22 percent of purchase and installation costs in 2023. 

      Qualifying products are fueled by wood or pellets (biomass), heat air or water, and have an efficiency of at least 75 percent per the higher heating value (HHV) of the fuel (overall efficiency). 

      See the EPA-certified heaters list to find qualifying products (look at the column for "Overall Efficiency").

      When does this tax credit go into effect and how long will it last?

      This tax credit went into effect on January 1, 2021. It is available for qualifying purchases and installations completed between January 1, 2021 and on/before December 31, 2023. The tax credit will need to be extended past 2023 by future legislation. Consumers claim the tax credit in the year in which product installation was complete.

      If I buy a qualifying product under a state/utility/other rebate/changeout program, do I have to reduce the amount of the federal tax credit?

      It depends on each taxpayer's situation. Below is what the IRS specifically says (from their 2013 FAQs on page 5).

      Public Utility. Under § 136, if a public utility provides (directly or indirectly) a subsidy to a customer for the purchase or installation of any energy conservation measure, the customer does not include in his or her gross income the value of the subsidy. As a result, the taxpayer may not claim a credit for the amount of the subsidy that is excluded from the taxpayer’s gross income. This rule applies whether a third-party contractor receives a subsidy on behalf of the taxpayer or the taxpayer receives
      the subsidy directly. Not all payments from a public utility fall within the provisions of § 136.

      Rebates. Rebates generally represent a reduction in the purchase price or cost of property, and the taxpayer must exclude the amount of the rebate from the amount of the qualified expenditure on which the taxpayer calculates the tax credit. In general, in order for a receipt of funds to be considered a nontaxable rebate, the rebate must be based on or related to the cost of the property; the rebate must be received from someone having a reasonable nexus to the sale of the property, for example, the manufacturer, distributor, or seller/installer; and the rebate must not represent payment or compensation for services.

      State Energy-Efficiency Incentives. A state may provide energy-efficiency incentives to encourage taxpayers to purchase qualifying property under § 25C or § 25D. Section 136 does not address these incentives. Generally, a taxpayer is not required to reduce the purchase price or cost of property acquired with a governmental energy-efficiency incentive that is not a rebate. Many states label their energy-efficiency incentives as rebates, but these incentives may not in fact constitute rebates or purchase-price adjustments for federal income tax purposes. 

      Can I claim both this federal tax credit and a state tax credit?

      Yes. Also, a taxpayer is not required to reduce the purchase price or cost of property acquired with a governmental energy/efficiency incentive that is not a rebate. Many states label their energy-efficiency incentives as rebates, but these incentives may not in fact constitute as rebates or purchase-price adjustments for federal income tax purposes. 

      How can I claim this tax credit on my tax return?

      Taxpayers may claim the credit on their federal income tax return form, starting on their 2021 return. The credit is a reduction of total income tax owed. This is a non-refundable tax credit available for individuals who pay federal taxes and who make energy-conscious purchases to improve the energy efficiency of their home.

      If your tax owed is reduced to zero by this credit, but you still have money left to claim, it can be carried over to the next tax year to further reduce your tax burden in the future.

      Paper Filing: The credit can be claimed on IRS Form 5695 under Residential Energy Efficient Property Credit. 

      Electronic Filing: If you are using tax filing software, the credit generally will be found under the "Credits" section of the Federal portion (Home Ownership – Residential Energy Credit).

      If you made a qualifying purchase and installation in a previous tax year and want to claim the credit, you need to file an amended return using IRS Form 1040-X

      What paperwork should a consumer retain for their personal tax records?

      You should retain (1) the sales receipt and any installation paperwork and (2) the manufacturer’s certification statement (if not available, documentation that the heater is at least 75 percent HHV efficient). 

      The sales receipt and installation documentation demonstrates that you purchased and completed installation of the qualifying heater during the effective time period of the credit. The retailer from whom you purchased the qualifying heater should also provide you with a manufacturer's certification statement indicating that the product qualifies for the tax credit. You aren't required to have a certification statement in order to claim the tax credit. A screenshot or printout of the product manual page listing the efficiency as at least 75 percent efficient per the HHV is sufficient.

      The certification statement should contain the name and address of the manufacturer; the class of qualified energy property; the make, model number and any other appropriate identifiers of the heater; a statement that the product is eligible; and a declaration, signed by a person currently authorized to bind the manufacturer in these matters (e.g. Under penalties of perjury, I declare that I have examined this certification statement, and to the best of my knowledge and belief, the facts are true, correct, and complete.).

      Manufacturers should make this certification document available to consumers on their website, in the product packaging, or in some other easily accessible manner.

      Are installation costs included in this tax credit?

      Yes. Installation costs are included. Sales tax can also be included.

      Installation costs cover expenditures for labor costs for onsite preparation, assembly, or original installation of the qualified heater. This also includes any venting/piping/wiring to connect the heater to the home.

      To ensure that your stove burns as efficiently, cleanly, and safely as possible, be sure to have it installed by a professional credentialed by the National Fireplace Institute.

      Can I claim the credit for a qualified heater installed in new, secondary, or vacation homes?

      Yes.

      Unlike the old Sec. 25(C) tax credit (now expired), you can claim this tax credit for purchasing and installing a qualifying heater in a new home and a secondary/vacation home. The secondary/vacation home cannot be an "investment property," such as a rental property that is not used by the taxpayer as a residence.

      Regarding new homes, a taxpayer can claim this credit for qualifying heaters installed in an existing home or a newly constructed home. 

      See the new home FAQ for additional discussion on how to claim the credit for a product installed in a new home.

       

      In the case of a newly constructed home, how does the taxpayer determine the cost of the qualifying property under Sec. 25(D)?

      The taxpayer may request that the homebuilder make a reasonable allocation or the taxpayer may use any other reasonable method to determine the cost of the property that is eligible for the Sec. 25(D) credit. Installation costs cover expenditures for labor costs for onsite preparation, assembly, or original installation of the qualified heater. This also includes any venting/piping/wiring to connect the heater to the home.

      If a homebuilder constructed a home and installed a qualifying heater in in Year 1, but the home wasn't sold and occupied until Year 2, may a taxpayer who buys that home and use it as a residence in Year 2 claim the tax credit?

      Yes. As long as the taxpayer begins to use the house as a residence before the tax credit expires, the taxpayer may claim the Sec. 25(D) credit in Year 2. 

      Sec. 25(D(e)(8) treats an expenditure in connection with the construction or reconstruction of a structure as made when the taxpayer begins to originally use the constructed or reconstructed structure as a residence.

      If the same scenario occurs with a model home, and the qualifying heater was used during the time it was marketed for sale, the taxpayer can still claim the Sec. 25(D) credit in Year 2. The expenditure is treated as made when the use of the structure as a residence begins.

      A taxpayer (Taxpayer A) purchases and moves into a newly constructed home in 2021 that contains a qualifying heater, and they claim the Sec. 25(D) credit in 2021. In 2023, Taxpayer A sells the home to Taxpayer B. Is Taxpayer B eligible for a credit?

      No. Sec. 25(D)(e)(8) generally treats an expenditure as made when the original installation of the qualifying property is completed.

      Only the taxpayer who begins the original use of the constructed or reconstructed structure as a residence or the taxpayer using the home as a residence when the property was originally installed is eligible for the tax credit.

        The Sec. 25(C) Tax Credit for Biomass Stoves (2008-2020)

          The Sec. 25(C) biomass stove tax credit expired after December 31, 2020. The credit must be claimed in the year in which product installation was completed.

          With this credit having expired, 2020 is the last year the biomass stove tax credit of $300 can be claimed on a tax return. 

          Download our one-pager on what consumers need to know about the 25(C) tax credit


          What is it?

          A $300 tax credit for purchasing and installation of a biomass stove that is at least 75 percent efficient (efficiency calculation is not specified).

          History of the 25(C) tax credit

          How to Claim It:

          Freestanding Stove

          Complete eligible purchase and installation by December 31, 2020.

          Retain the receipts from your purchase as well as the manufacturer certificate stating the stove qualifies.

          Claim the credit on your federal income tax form.

          If you made a qualifying purchase and installation in a previous tax year and you want to claim the credit, you may file an amended return using IRS Form 1040-X

          • File Via Tax Software: Located in the “credits” section of the Federal portion under home ownership (or under "Home & Vehicles") and look for reference to the residential energy credit (Form 5695). Look for reference to the $300 credit. Contact the filing software provider you are using for any additional questions.
          • File Via U.S. Mail: Located on line 22a of IRS form 5695 under residential energy property costs and energy-efficient building property. The IRS provides additional instructions for this form.

          For more information, see our FAQs at the bottom of this page. 

          Have questions? Contact Rachel Feinstein.

          View HPBA's policy position statement.

            Sec. 25(C) (2008-2020) Biomass Stove Tax Credit FAQs

            How can I claim this tax credit on my tax return?

            Taxpayers may claim the credit on their federal income tax return form. The credit is a reduction of total income tax at the bottom of your return of $300. This is a non-refundable tax credit available for individuals who pay federal taxes and who make energy-conscious purchases to improve the energy efficiency of their home.

            Paper Filing: The credit can be claimed on IRS Form 5695 on line 22a (Residential energy property costs -- Energy-efficient building property).

            Electronic Filing: If you are using tax filing software, the credit generally will be found under the "Credits" section of the Federal portion (Home Ownership – Residential Energy Credit).

            If you made a qualifying purchase and installation in a previous tax year and want to claim the credit, you need to file an amended return using IRS Form 1040-X

            What paperwork should a consumer retain for their personal tax records?

            You should retain (1) the sales receipt and (2) the manufacturer’s certification statement. The sales receipt demonstrates that you purchased the qualifying stove during the effective time period of the credit. The retailer from whom you purchased the qualifying stove should also provide you with a manufacturer's certification statement indicating that the product is qualified for the tax credit. You aren't required to have a certification statement in order to claim the tax credit.

            This certification statement should contain the name and address of the manufacturer; the class of qualified energy property; the make, model number and any other appropriate identifiers of the stove; a statement that the product is eligible; and a declaration, signed by a person currently authorized to bind the manufacturer in these matters (e.g. Under penalties of perjury, I declare that I have examined this certification statement, and to the best of my knowledge and belief, the facts are true, correct, and complete.).

            Are installation costs included in this tax credit?

            Yes. Installation costs are included. To ensure that your stove burns as efficiently, cleanly, and safely as possible, be sure to have it installed by a professional.

            Are biomass stoves installed in new or vacation homes covered by this tax credit?

            No. The credit only applies to a purchase made for your existing principal residence.

            When does this tax credit go into effect and how long will it last?

            This tax credit is valid only for the purchase and installation of a qualifying biomass stove made before December 31, 2020. Consumers would claim the tax credit in the year in which it was purchased.

            What is the Biomass Stove Tax Credit? What products qualify?

            This U.S. federal tax credit encourages people to make energy-conscious purchases that improve the energy efficiency of their home. It is a $300 dollar-for-dollar, non-refundable, tax credit for purchasing a qualifying biomass-burning stove before December 31, 2020. Biomass simply means the stove uses wood or pellet fuel.

            Any biomass appliance that meets or exceeds an energy efficiency rating of 75 percent qualifies for this credit. This credit applies to qualifying stoves that heat the air or water. However, visit your local specialty retailer who can explain which products qualify for the tax credit.

            What Does the IRS Say? 

            Energy-efficient building property (covered by this credit includes) a stove that uses the burning of biomass fuel to heat your home or heat water for your home that has a thermal efficiency rating of at least 75%. 

            What must a manufacturer's certification statement contain?

            A manufacturer's certification statement must contain the following information: 

            • The name and address of the manufacturer.
            • Identification of the class of qualified energy property (Biomass-Burning Stove) in which the property is included.
            • The make, model number and any other appropriate identifiers of the stove.
            • A statement that the product is an eligible qualified energy property.
            • A manufacturer's certification statement must contain a declaration, signed by a person currently authorized to bind the manufacturer in these matters, in the following form: "Under penalties of perjury, I declare that I have examined this certification statement, and to the best of my knowledge and belief, the facts are true, correct, and complete."

            If someone claimed this tax credit in past years, may they claim it again this year?

            Yes, but only if you haven't already exceeded the $500 lifetime cap of the credit. If you  have exceeded the $500 lifetime cap of the credit, you may not claim it again.

            The non-business energy property credit (which covers the biomass stove tax 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 per consumer for all expenditures claimed under the credit since December 31, 2005.

            What Does the IRS Say?

            If the total of any non-business energy property credits you have taken in the previous years (after 2015) is more than $500, you generally cannot take the credit. 

            Why was 75 percent efficiency selected?

            The 75 percent efficiency number was originally designated by the U.S. Congress in 2008 as part of the Emergency Economic Stabilization Act and was used again for this tax credit.

            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.

            What should a retailer advise 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 the qualified non-business energy property should retain the certification statement as part of their tax records if a certification statement is provided.

            Manufacturers should make this certification document available to consumers on their website, in the product packaging, or in some other easily accessible manner.

            What Does the IRS Say?

            For purposes of taking the credit, you can rely on a manufacturer’s certification in writing that a product is qualified residential energy property. Do not attach the certification to your return. Keep it for your records.