Government Incentives for Green HVAC Upgrades Posted on July 30, 2024 In the United States, HVAC accounts for up to 30% of a commercial building’s energy consumption, according to studies by the US Energy Information Administration. Upgrading HVAC systems to more energy-efficient models can reduce utility bills considerably. As an added benefit, it also minimizes the facility’s environmental impact. To encourage the adoption of green HVAC systems, the US government, along with state and local agencies, offers a variety of incentives. These include tax credits, rebates, and grants aimed at residential, commercial, and industrial sectors. In this guide, we explore the different incentives for green HVAC systems, their requirements, qualifying products, and other important information to help you when considering an HVAC upgrade. Federal Incentives On the federal level, the Inflation Reduction Act of 2022 is a key piece of legislation that offers financial incentives for green HVAC upgrades. This landmark act encourages homes and buildings to be more energy-efficient by providing federal tax credits and deductions and ease the transition to cleaner energy sources. Residential Incentives 1. Energy Efficient Home Improvement Credit (25C) This credit is available for homeowners who make energy-efficient upgrades to their homes, including HVAC systems, beginning in 2023 and lasting up until 2032. Qualified homeowners can get tax credits up to 30% of allowable expenses, with a maximum limit of $3,200 per year. These are divided into: $1,200 for energy property costs and certain energy efficient home improvements, with limits on doors ($250 per door and $500 total), windows ($600) and home energy audits ($150) $2,000 per year for qualified heat pumps, biomass stoves or biomass boilers For HVAC systems, qualifying products include high-efficiency air conditioners, heat pumps, furnaces, or boilers that meet the highest efficiency tier set by the Consortium for Energy Efficiency (CEE) or the Energy Star program. Restrictions While there is no lifetime limit, any excess credits cannot be applied to the next tax year. The home must be the primary residence where the owner resides for the majority of the year. Landlords and property owners who don’t live in the home are not eligible. Homes that are used partly for business have a different tax credit: Business use up to 20%: full credit Business use more than 20%: credit based on share of expenses allocable to nonbusiness use. Qualified homeowners can use IRS Form 5695 (Residential Energy Credits) together with their tax return to claim the credit. The claim must be filed on the year the product is installed, not when it was purchased. 2. Residential Renewable Energy Tax Credit (26) This credit applies to homeowners who install renewable energy systems, including solar, wind, geothermal, and fuel cell technologies, installed between 2022 to 2032. They can recoup up to 30% of the cost of the system. The credit will go down to 26% for qualified upgrades installed in 2033, and 22% by 2034. Qualifying products include geothermal heat pumps for HVAC, as well as solar panels, solar water heaters, and small wind turbines. Restrictions The geothermal heat pump must be EnergyStar-certified. Homes that are used partly for business can recoup: Business use up to 20%: full credit Business use more than 20%: credit based on share of expenses allocable to nonbusiness use Any excess unused credit can be carried over to the next tax year. Qualified homeowners can use IRS Form 5695 (Residential Energy Credits) together with their tax return to claim the credit. Commercial and Industrial Incentives 1. Section 179D Energy Efficient Commercial Buildings Deduction This incentive allows building owners to deduct the cost of energy-efficient property installations. It provides up to $1.80 per square foot for buildings achieving a 50% energy savings target. Compliance PathSavings RequirementTax Deductiontaxable years before 2021taxable year beginning 2021taxable year beginning 2022Fully Qualifying Property50%$1.80/ft²$1.82/ft²$1.88/ft²Partially Qualifying PropertyEnvelope10%$0.60/ft²$0.61/ft²$0.63/ft²HVAC and HW15%Lighting25% Restrictions The energy savings must be measured against the latest ASHRAE standard at least 4 years before the property is placed in service. For buildings that begin construction on or after January 1, 2023, and have energy efficient property placed in service on or after January 1, 2027, ASHRAE Standard 90.1-2019 applies. For buildings that begin construction before January 1, 2023, or are placed in service before January 1, 2027, ASHRAE Standard 90.1-2007 applies. For the latest ASHRAE standard, you can see more information on the IRS website. 2. Business Energy Investment Tax Credit (ITC) This credit is available for businesses that invest in renewable energy systems. It provides up to 30% credit of the cost of installation. This applies to solar, wind, geothermal, and other renewable energy systems. Restrictions Projects under 1 MW: Full tax credit projects that begin construction after 2021 and before 2025. Projects over 1 MW: Projects that begin construction before January 1, 2025 will receive a base tax credit of 6%. However, projects can qualify for the full 30% credit if all laborers involved in the construction or maintenance of the project for 5 years after project completion are paid wages at rates not less than prevailing wages. Projects must also ensure that a percentage of total labor hours are performed by qualified apprentices. State and Local Incentives State and local governments offer various incentives that complement federal programs. These can vary widely, so it’s important to check with local agencies for the most current information. Residential Incentives 1. State-specific Efficiency Rebates Many states offer rebates for homeowners who install energy-efficient HVAC systems. Rebates vary, typically ranging from $100 to $1,000 depending on the system and state. These typically apply to high-efficiency air conditioners, heat pumps, furnaces, and boilers. 2. Property Assessed Clean Energy (PACE) Financing PACE programs allow homeowners and businesses to finance energy-efficient upgrades through their property taxes. These innovative programs provide upfront financing for energy-efficient improvements, which are then repaid through property tax assessments lasting 10 to 20 years. The loan is secured by the property itself and paid as an addition to the owners’ property tax bills. Residential PACE Residential PACE financing programs are currently available in the following states: California (10 active programs) Florida (4 active programs) Missouri (3 active programs) Commercial PACE For commercial operations, Commercial PACE or C-PACE programs are available in 37 states as well as the District of Columbia. You can refer to the Department of Energy’s C-PACE page for more information. Commercial and Industrial Incentives 1. State-Specific Tax Credits and Rebates States offer tax credits and rebates for businesses that upgrade to energy-efficient HVAC systems. Such incentives vary, often based on the energy savings achieved, and apply to high-efficiency commercial HVAC systems. Check your state’s programs for HVAC upgrade incentives. 2. Utility Company Rebates Many utility providers offer rebates to commercial and industrial customers who install energy-efficient systems. These rebates can significantly offset installation costs while ensuring long-term energy savings. Contact your utility provider to determine what incentives they offer for commercial HVAC upgrades. Qualifying HVAC Products To qualify for these incentives, HVAC systems must typically meet specific energy efficiency standards. These are the common criteria used to determine qualification: 1. EnergyStar Certification EnergyStar is a joint program by the Energy Department and the Environmental Protection Agency. It certifies products that meet strict energy efficiency guidelines. In addition to being required by many federal and state incentives, the EnergyStar label certifies that the product is up to 40% more energy efficient than its non-certified counterparts. 2. Consortium for Energy Efficiency (CEE) Tiers The CEE is a nonprofit organization that promotes and certifies energy efficient products, including HVAC systems. Products meeting CEE Tier 2 or higher often qualify for incentives. 3. Seasonal Energy Efficiency Ratio (SEER) SEER measures how efficiently an AC unit or heat pump operates over one season. It is used as a measure of energy efficiency in larger AC units and heat pumps. Higher SEER ratings indicate more efficient systems. Many incentive programs require a minimum SEER rating for the HVAC product to qualify. 4. Heating Seasonal Performance Factor (HSPF) This is a measurement of heating efficiency for heat pumps. Higher HSPF ratings indicate a more efficient heat pump. Federal and local incentives specify a minimum HSPF rating for the heat pump to qualify. 5. Annual Fuel Utilization Efficiency (AFUE) This metric measures how efficiently a furnace converts fuel to heat. Higher AFUE ratings indicate more efficient furnaces and boilers. Many programs specify a minimum AFUE rating for the furnace or boiler to qualify for the incentive. How to Apply for Incentives for HVAC Upgrades 1. Research available programs Start by researching federal, state, and local programs that offer incentives for green HVAC upgrades. 2. Verify product eligibility Ensure the HVAC systems you plan to install meet the required energy efficiency standards. Check whether the deadlines meet your planned dates of installation. Many programs qualify upon the date of installation, not the date of purchase. 3. Consult with professionals Work with certified contractors and professionals who can help navigate the application process. Some programs also require that certified contractors do the installation in order to qualify. 4. Documentation Collect all necessary documentation, including receipts, proof of installation, and certification of energy efficiency. 5. Submit application Follow the specific application process for each program, paying attention to deadlines and required forms. Conclusion Government incentives for green HVAC upgrades provide valuable financial support for residential, commercial, and industrial sectors. This allows them to offset the cost of the upgrade while transitioning to green HVAC systems and reaping long-term savings. By taking advantage of these programs, individuals and businesses can reduce energy costs, enhance comfort, and contribute to environmental sustainability. Before embarking on your next HVAC purchase, always check the latest information and specific program details to ensure eligibility and maximize benefits of your planned upgrade. Mickey Luongo Mickey is the resident heating and air conditioning expert with over 15 years of experience in the industry.