How Important Is 25c Anyway?

The Energy Efficient Home Improvement Credit (Section 25C) was improved a few years ago to provide up to $3,200 per year for energy-efficient home improvements. The maximum credit that can be claimed each year is $1,200 for energy-efficient property costs and certain energy-efficient home improvements, with limits on exterior doors ($250 per door, $500 total), exterior windows and skylights ($600) and home energy audits ($150), and $2,000 per year for qualified heat pumps, water heaters, biomass stoves or biomass boilers, per the IRS. 

“The Inflation Reduction Act’s improvements to 25C do make it far more valuable for contractors, and we saw that in our recent town hall surveys, more than twice as many contractors picked the energy efficiency incentives as being their top tax priorities over things like small business taxes and individual rates,” said Sean Robertson, vice president of membership, advocacy and events at Air Conditioning Contractors of America (ACCA). “And among the efficiency tax incentives, 25C was also by far the most popular.”

Part of 25C’s popularity is due to its simplicity and current nationwide availability. 

Robertson said this has often been cast in contrast to the Inflation Reduction Act (IRA) home energy rebate programs that have been seen as more bureaucratic, confusing, overly prescriptive, and not available nationwide. 

“And interestingly enough, these bills did not eliminate funding for the rebate programs, although they did eliminate funding for the Training for Residential Energy Contractors program. … I think the reason for that is that the federal government, in the waning days of the Biden administration, signed binding contracts with the states, backed by the full faith and credit of the U.S. government, and they may have made a judgment that it'll be hard to back away from,” Robertson said. “I still think contractors would be very frustrated to see the simple and nationally available tax credits under 25C go away.”

While the use of Section 25C appears to vary widely across the country, according to Alex Ayers, vice president of government affairs at Heating, Air-conditioning, & Refrigeration Distributors International (HARDI), it does have an impact on what equipment distributors carry for those customers wanting to install compliant equipment. 

“It was a major frustration for members when the Consortium for Energy Efficiency increased the minimum efficiency to qualify in late 2024, because many had already ordered inventory based on the previous standard,” said Ayers. 

Impact On Businesses

What 25C did for contractors was provide an opportunity to sell more complete jobs, and more efficient equipment. It was a way to lessen the pain of an upgrade to increase efficiency and the additional work it would take to get value from the system. 25C helped ensure that customers were getting what they paid for. 

“If you look at Congress' estimates of how much eliminating this tax credit will save — that suggests that a lot of homeowners out there are taking advantage of it, and we're seeing a widespread impact now,” Robertson said. 

Many contractors have also been using 25C in their marketing materials, driving business by informing customers about the credits they’d be eligible for. 

“And without this incentive, I think our members will see it become harder to sell these additional improvements,” Robertson said. 

HARDI has seen Section 25C used to upsell equipment.

“However, with the increased efficiency requirement, for many products, the increased cost of the qualifying equipment was greater than the value of the tax credit,” said Ayers. “This made the tax credit a nice bonus for customers who might have purchased the equipment anyway, defeating the tax incentive's purpose to drive behavior. If the tax credit goes away, it will be interesting to see if purchases change to verify if the tax incentive influences decision-making.”

There are a few factors that the industry has seen limit the effectiveness of 25C. For example, changing performance standards inevitably alter what qualifies for a credit. 

“We have seen multiple incentives over the years; some tax incentives have been excellent at promoting energy efficiency,” said Ayers. “The latest version of Section 25C made some significant improvements to how the tax credit was structured, but leaving the determination of what equipment qualifies for the tax credit with a nongovernmental organization drove changes that limited the impact of the tax credit.”

Alternatives And Recommendations

Conversations around these potential eliminations have prompted the industry to look at alternative ways to combat the potential effects the loss could have. One of these is to capitalize on the programs that, at least right now, don’t seem to be going away.
 “There are hundreds of rebate programs across the country, many driven by utility companies, that promote energy efficiency and make products more affordable for consumers,” said Ayers. “HARDI will continue to work with anyone offering rebates to provide advice on how to best structure the rebates to help the end consumer save money and reduce their energy bill.”

Robertson thinks that there could still be tax credits, but one way to make them more affordable is to structure them in a way that ensures greater value for both consumers and the federal government. One approach, he said, would be to tie incentives to verified quality installation standards. Rather than simply rewarding the purchase of higher-efficiency equipment, incentives should also promote proper system design and installation, helping to ensure homeowners actually receive the performance they’re paying for.

While measuring quality installation has historically been difficult, with advances in smart tools, apps, and onboard diagnostics, it's now possible to verify proper system performance at scale. Additionally, there are association offerings like ACCA’s quality installation certificates, which involve design reviews to confirm systems are installed to specification. 

“Making tax incentives contingent on that kind of quality installation really would accomplish two things,” Robertson said. “One, it would help incentivize customers to work with quality contractors who are going to do a proper system design and help ensure that they get what they pay for. [Two], it would also make the tax credits less expensive for Congress to extend by somewhat limiting their applicability.”

Ultimately, the industry is advocating for improvements to Section 25C, in hopes of not seeing it completely repealed. 

“Unfortunately, many policy decisions are driven by political motivations to repeal anything related to the IRA, regardless of past bipartisan support for the tax credit,” Ayers said. “Returning to the previous version of Section 25C that existed before the IRA would be a better solution that meets the same political goal.”

In terms of policy alternatives, Robertson said ACCA supports compromise proposals under discussion in the Senate that would extend the credits through 2028 — if not through 2032 as originally intended. Even if current efforts fail, ACCA plans to advocate for the inclusion of 25C incentives in the year-end extenders package, potentially on a smaller scale. That could involve reducing the maximum credit amounts — for example, scaling back 25C’s $2,000 credit for heat pumps — or trimming 45L bonuses tied to Zero Energy Ready Homes or prevailing wage requirements, which might help offset the cost of extending the credits.

“The fight's not over,” said Chris Czarnecki, director of government relations at ACCA. “If these credits do end up going away as part of the ‘Big, Beautiful Bill,’ it'll continue to be a priority for us to promote.”