Clarification on Certified Properly Matched Systems

To qualify for the central air-conditioner or split heat pump tax credit, the indoor and outdoor equipment must be a certified proper match. Here is a simple explanation for homeowners:

Replacing Split Systems to Achieve Tax Credit Level Efficiencies-

When replacing a split system (either air conditioning or heat pump), consumers are sometimes confused as to which components need to be replaced to achieve an efficiency rating high enough to qualify for the Federal Tax Credit. This is because there are really three components that are required to make a 'system'. The outdoor unit (whether it be air conditioner or heat pump) is rated along with the indoor coil (or air handling unit which contains the indoor coil), and the air moving device which may be a furnace or the blower section of an air handling unit. To further complicate matters, an air handling unit may sometimes be called an 'electric furnace' as it is just an air handling unit (blower and indoor coil) with an electric heater for supplemental heating. All of these three components work together to define the efficiency of the air conditioning or heat pump system. While it is easy to see that the outdoor unit must be properly matched with an indoor unit to obtain the desired efficiency, the power consumed by the air moving device (the blower section of the furnace or air handling unit) plays a critical role i n the overall efficiency of the system. Many of the higher rated systems depend on an advanced technology main air circulating fan to achieve these higher efficiency levels. Since most older furnaces or air handling units lack these high efficiency (advanced technology main air circulating fan) blowers, the replacement of the furnace or air handling unit becomes a necessary part of the replacement system in order to achieve targeted efficiency levels for the air conditioning or heat pump system. Properly matched indoor and outdoor equipment systems are certified by manufacturer so products from two different manufacturers will not match.

Homeowner Tax Credit Guidance Finally Issued By IRS

The IRS has finally released a guidance document for the residential energy efficiency tax credits that were expanded and extended by ARRA, the stimulus bill. This guidance document specifically addresses the confusion surrounding the advanced main circulating fan tax credit, essentially reinforcing HARDI's interpretation that if the furnace does not qualify (sub-95% AFUE) then only 30% of the equipment and labor costs specific to the advanced fan to up to $1,500 are eligible for the tax credit. Here is the section from the guidance document:

Natural Gas, Propane, or Oil Furnace with an Advanced Main Air Circulating Fan. If a natural gas, propane, or oil furnace is qualified energy property, the entire amount paid or incurred to purchase and install the furnace, including any costs attributable to the furnace’s main air circulating fan, are taken into account in determining the amount of the credit under § 25C. If the furnace is not qualified energy property, but the furnace’s main air circulating fan is qualified energy property, only the amount paid or incurred to purchase and install the fan are taken into account in determining the amount of the credit under § 25C. In such a case-- (1) The amount paid or incurred to purchase and install the main air circulating fan may be determined by any method that reasonably allocates costs between the fan and other components of the furnace; (2) The manufacturer of the furnace may determine, using any reasonable method, the percentage of the cost of the furnace that is allocable to the fan and inform taxpayers of the percentage in the certification it provides under section 6 of this notice; and (3) A taxpayer may treat this percentage of the total amount paid or incurred to purchase and install the furnace as the amount paid or incurred to purchase and install the advanced main air circulating fan. If a manufacturer certifies the percentage of the cost of the furnace allocable to an advanced main air circulating fan, the manufacturer must maintain in its records the basis for such allocation. The manufacturer must, upon request, make such documentation available for inspection by the Service.

Here is Energy Star's FAQ response to the advanced fan credit question as well in case your customer is seeking additional information.

Q: **Update** How does the Advanced Main Circulating Fan credit work?

A: The stimulus bill expanded the tax credit for advanced main circulating fans from a straight $50 credit for any furnace equipped with such a fan to 30% up to $1,500 for advanced main circulating fans that account for less than 2% of the furnace's total annual energy used (based on standard Department of Energy test procedures). There remains uncertainty how the credit can be claimed on an advanced fan installed as part of a non-qualifying furnace (less than 95% AFUE). HARDI just received indication from the IRS that they are currently intending to interpret this credit to mean that any advanced fan-equipped furnace that has less than a 95% AFUE can only qualify the costs specific to the advanced fan, not the entire furnace, for the tax credit. Equipment manufacturers are currently pursuing and expedited official IRS clarification that will hopefully provide concrete certainty soon, but the latest indication is that only the costs specific to the advanced fan will qualify for the tax credit on furnaces less than 95% AFUE. HARDI advises that members refer to their tax professionals before recommending to customers what will and will not qualify for this tax credit.

**Update on Non-Refundable Tax Credits

As an update to this earlier post regarding these "non-refundable HVAC tax credits", here is a boiled down recommendation on how contractors should explain these tax credits to homeowners:

The HVAC tax credits are non-refundable tax credits which means that they can only be claimed if the taxpayer owes as much or more in taxes than the tax credits they are filing for. This can vary tremendously from taxpayer to taxpayer due to personal or household deductions, other credits, and the Alternative Minimum Tax so homeowners need to check with their tax advisor to determine whether they will most likely be able to qualify for a $1,500 tax credit.

**Updated** Q: Are these tax credits limited by the AMT?

A: The original 2006-2007 tax credits were limited by the Alternative Minimum Tax, but the American Recovery and Reinvestment Act of 2009 lifted that limitation for these expanded residential energy efficiency credits for 2009. This tax credit claimed in 2010, however, is still limited by the AMT unless Congress amends the credit again.

The geothermal, solar, and wind upcapped tax credits are also not limited by the AMT through 2016. When these credits are not limited by the AMT, the taxpayer's total tax credit limit is determined by the sum of the taxpayer's tax liability PLUS the AMT.

Q: If a homeowner claims a $1,500 credit for installing a qualified appliance, are they still eligible for the solar or geothermal credit?

A: Yes. The capped $1,500 tax credit for most HVAC equipment is separate from the uncapped geothermal, solar, and wind tax credit. For example, a homeowner could install a qualifying water heater and claim 30% of the installation costs up to $1,500 then install a geothermal heat pump and claim up to 30% of that total installation cost as well.

Q: What if two components are being installed but only one qualifies for the tax credit?

A: For example, a non-qualifying central air-conditioning system is installed at the same time as a qualifying gas furnace (or vice versa). In this case, only 30% of the costs, up to $1,500, associated with the furnace installation would qualify for the tax credit. Energy Star just updated their FAQ on this as well.