Wood and Pellet Heater Investment Tax Credit (ITC)

January 2023 UPDATE:

In December 2022, the IRS issued its new Guidance and FAQs for the new 25(C) tax credit (effective for installations January 1, 2023 and December 31, 2032) and updated its guidance for the expiring 25(D) tax credit (effective for installations between January 1, 2021 and December 31, 2022) can be found at the button link below. HPBA highlighted the important Sections of the Guidance and FAQs.

HPBA has also updated its one-pager information page for retailers, which can be found at the button link below.

Feel free to contact Government Affairs Department with any questions that are not answered by our website.

HIGHLIGHTED IRS GUIDANCE & FAQ

RETAILER ONE-PAGER

September 2022 UPDATE:

With the August 16, 2022, signing of the Inflation Reduction Act (IRA), high-efficiency biomass heating products once again qualify for a tax credit under Section 25(C) of the Internal Revenue Code (“IRC” or “tax code”). This new 30 percent tax credit – capped at $2,000 annually – is available for appliances installed between January 1, 2023, and December 31, 2032. The credit can be used on the purchase and installation costs of qualifying appliances. To be eligible for the tax credit, an appliance must have a thermal efficiency of at least 75 percent per the higher heating value (HHV) of the fuel. The IRA removes our products from Sec. 25(D) of the tax code where appliances were eligible for an uncapped 26 percent tax credit in 2021 and 2022.

Guidance and FAQs for both the upcoming 25(C) tax credit (effective for installations from January 1, 2023 and December 31, 2032) and the expiring 25(D) tax credit (effective for installations between January 1, 2021 and December 31, 2022) can be found further down the page. Feel free to contact Government Affairs Department with any questions that are not answered by our website.

Beginning in 2023, consumers buying highly efficient wood or pellet stoves or larger residential biomass heating systems may be eligible to claim a 30% tax credit – capped at $2,000 annually – based on the full cost (purchase and installation) of the unit. The credit runs through December 31, 2032. The 10-year term and 30 percent credit have been big components of HPBA’s advocacy push of the Biomass Thermal Utilization (BTU) Act over many years.

Please contact Government Affairs Department if you have any questions.

What is this new tax credit?

Effective Dates: The new tax credit under Sec. 25(C) of the U.S. Internal Revenue Code (“IRC” or “tax code”) is effect on January 1, 2023 for qualifying purchases and installations completed on or after that date, through December 31, 2032.
Credit Amount: Creates a new tax credit of 30 percent of the purchase and installation costs (with a $2,000 annual cap with no lifetime limit) for tax years 2023 through 2032.
Qualifying Products: Qualifying products (any biomass-fueled heater) must have a thermal efficiency of at least 75 percent per the higher heating value (HHV) of the fuel
- The EPA certified wood heater database may be referenced (not all products on the EPA list qualify. Look for products with efficiencies of at least 75 percent)
- A manufacturer certification statement attesting that a product qualifies can also be relied upon

What happens to the 25(D) tax credit?

Eliminates the tax credit for biomass stoves under IRC Sec. 25(D) starting in 2023
Any product purchased in 2022 that qualifies for the new Sec. 25(C) credit, but isn't installed until 2023, can be claimed under the Sec. 25(C) credit on a 2023 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 Government Affairs Department if you have any questions.

The below Wood and Pellet Heater ITC FAQs are organized into five categories:

Public Records: Historical tax credit information
Qualifying Products: Where/how to find products that qualify for the tax credit
Paperwork: What records should be kept by taxpayers, information about tax filings, format of product/work invoice
Covered Costs: What types of costs associated with installation of a qualifying product could also be included in the total cost used to calculate the tax credit
Calculating the Credit: Issues that should be considered when calculating the credit

The Hearth, Patio & Barbecue Association (HPBA) and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

FAQs for Previous Biomass Tax Credits

2021-2022 Wood and Pellet Heater ITC FAQs

PUBLIC RECORDS: 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.

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

Yes. The IRS updated its tax forms for this credit in November, here: https://www.irs.gov/pub/irs-dft/f5695--dft.pdf

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

PUBLIC RECORDS: 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.

PUBLIC RECORDS: 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, 2022. The tax credit will need to be extended past 2022 by future legislation. Consumers claim the tax credit in the year in which product installation was complete.

QUALIFYING PRODUCTS: 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 a thermal efficiency of at least 75 percent per the higher heating value (HHV) of the fuel.

Talk to your nearest specialty hearth dealer about which products qualify.

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

QUALIFYING PRODUCTS: Can a consumer claim the credit for a used stove that meets the tax credit requirements?

No, the tax credit cannot be claimed for any used appliance. Sec. 25(D)(e)(8) generally treats an expenditure as made when the original installation of the qualifying property is completed. So, it would not apply to a used appliance.

QUALIFYING PRODUCTS: I've noticed that many woodstoves are not listed on the EPA database website. Why is this? Is there another website we can utilize?

Any wood or pellet heater that is regulated by the U.S. EPA must be certified and would be on the EPA database list. It is possible that if you are looking for a certain product but aren’t finding it on the list that it is listed under a different name than what you are using in your search. It is also possible that a product is newly EPA-certified and the EPA has not yet updated the list. Check with the appliance manufacturer if you are having trouble locating it on the list.

PAPERWORK: 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."

PAPERWORK: 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.

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

Taxpayers may claim the credit on their federal income tax return form in the year in which product installation is complete. 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.

You should always consult a tax professional as individual situations may vary.

Paper Filing: The credit can be claimed on IRS Form 5695 on line 5, "Qualified biomass fuel property costs." heaters.

Electronic Filing: If you are using tax filing software, the credit generally will be found under the "Credits" section of the Federal portion (Home and Vehicles– Residential Energy Credit or Credit Carryforward). On H & R Block, the credit is not under "Residential Energy Credits;" it can be claimed under the "Alternative Energy Credit." This is on the page after "Residential Energy Credits" after you indicate "No" when asked if you've made a purchase that qualifies for the "Residential Energy Credit."

If you have a credit carryover from a previous year (2021 and on), you can use this same form.

PAPERWORK: 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.

PAPERWORK: Will the cost of the appliance and installation need to be itemized in order to fill out the form?

A taxpayer does not need to include a copy of their purchase receipt in order to claim the tax credit. Thus, it is not “necessary” to itemize the receipt, but it is a good idea to do so in case the customer undergoes an audit and needs to show which part of the cost was for the appliance and which parts of the cost were for labor or other materials needed to complete installation.

COVERED COSTS: Are installation costs included in this tax credit?

Yes. Installation costs are included. Sales tax can also be included. Always consult a tax professional for issue-specific guidance.

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.

COVERED COSTS: 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.

Always consult a tax professional for issue-specific guidance.

COVERED COSTS: Would this credit cover any cost on demo/removal of old unit to upgrade to the new unit?

It depends. Individual circumstances vary. If it's part of the installation process, preparation and installation, it might. But they need to make sure they're following the related IRS guidance. Consult a tax professional.

COVERED COSTS: Can you include the optional blower on a wood stove as part of the total cost?

Most likely not if it is optional. Check with a tax professional as individual situations may vary.

COVERED COSTS: Will additional work required to bring the ventilating system up to code, for example: installing a wood burning insert in a masonry fireplace in which the flue has glazed creosote, will this work be coverable by the tax credit?

It may depend on the individual’s situation, so consult a tax professional. It might be considered necessary work to complete a safe installation. But, always consult a tax professional in the absence of definitive IRS guidance.

COVERED COSTS: We have a customer installing two stoves that qualify for the tax credit. They want to install an all-masonry chimney with a flex liner instead of using hard pipe. Can they include the cost of the masonry chimney in the total amount?

Most likely, but always check with a tax professional. It might be considered a component necessary to complete installation of the qualifying product. The credit covers the installation costs, including venting. Could masonry chimney be considered venting? Yes. Always check with a tax professional on situations like this as the answer can vary in each case.

COVERED COSTS: Would any repairs to the chimney crown associated with making sure the chimney liner's top plate is properly sealed qualify for the credit?

It may depend on the individual’s situation, so consult a tax professional. It might be considered necessary work to complete a safe installation. But always consult a tax professional in the absence of definitive IRS guidance.

CALCULATING THE CREDIT: 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. Always consult a tax professional for issue-specific guidance.

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.

CALCULATING THE CREDIT: Can I claim both this federal tax credit and a state tax credit?

Yes, but always consult a tax professional. 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.

Always consult a tax professional for issue-specific guidance.

CALCULATING THE CREDIT: 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.

Always consult a tax professional for issue-specific guidance.

CALCULATING THE CREDIT: 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.

Always consult a tax professional for issue-specific guidance.

CALCULATING THE CREDIT: A taxpayer (Taxpayer A) purchases and moves into a new home in 2021 that has a qualifying heater. They claim the tax 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.

Always consult a tax professional for issue-specific guidance.

CALCULATING THE CREDIT: If you buy a woodstove as a gift for someone who lives in a different house, who gets to claim the tax credit? The stove gifter or the new stove owner?

A person in this situation needs to talk to a tax professional. It depends on their own individual situation. It is possible that neither can claim the credit, but it is certain that the credit should not be claimable by both parties. The circumstances really depend on the individual situation. A tax professional must be counseled.

CALCULATING THE CREDIT: How many years can you carryover the extra credit on your tax return?

It depends on an individual’s circumstance. Check with a tax professional because individual circumstances can vary.

The IRS says: If the credit allowable under subsection (a) exceeds the limitation imposed by section 26(a) for such taxable year reduced by the sum of the credits allowable under this subpart (other than this section), such excess shall be carried to the succeeding taxable year and added to the credit allowable under subsection (a) for such succeeding taxable year.

CALCULATING THE CREDIT: In what order should other tax credits being claimed be calculated? For example, should I calculate the biomass heater tax credit first and then calculate the solar credit for my new solar panels?

The answer to this depends on your individual circumstances. Consult a tax professional. Since there is no lifetime limit on the 25(D) tax credit, the order in which the credits are claimed may not be as important as in years past.

CALCULATING THE CREDIT: Can the credit be used for more than one qualifying appliance? Is there a limit on the number of qualifying units claimed in one house?

The answer may depend on an individual’s tax circumstances and a tax professional should be consulted. The language of the credit does not identify any limit on the number of products installed in one residence that can qualify for the credit and there likely is no such a limit (the credit can be claimed for any qualifying product). Your tax advisor may have additional information about limitations based on a person’s tax situation.

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 above are a good place to start, we strongly encourage you to review the IRS guidance document 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.