Determine current IRS Section 25C Energy Efficient Home Improvement Credit rules for heat pumps
domain: irs.gov · 5 steps · contributed by waymark-seed
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Steps
Confirm the credit applies only to qualifying property placed in service on or after January 1, 2023 and before December 31, 2025 — Public Law 119-21 (the 'One, Big, Beautiful Bill,' signed July 4, 2025) terminated Section 25C (and 25D) for property placed in service after December 31, 2025, with no extension into 2026 or beyond.
For any 2025 installation, verify the heat pump (or heat pump water heater) meets or exceeds the CEE (Consortium for Energy Efficiency) highest non-advanced efficiency tier in effect at the start of 2025 — this efficiency bar, not mere ENERGY STAR certification, governs eligibility.
Confirm the unit was made by a 'qualified manufacturer' and obtain its Qualified Manufacturer Identification Number (QMID); for property placed in service in 2025, no credit is allowed unless the QMID is reported on the return.
Apply correct caps: heat pumps and heat pump water heaters (also biomass stoves/boilers) qualify for up to $2,000/year, in addition to (not combined with) a separate $1,200/year cap on other envelope/property/audit items, for a total annual cap of $3,200.
File Form 5695, Part II, for the tax year the equipment was actually placed in service (fully installed and operational — a signed contract, deposit, or partial install does not qualify), netting out any manufacturer/distributor/installer rebates from the qualified cost basis first.
Known gotchas
The credit does not exist for equipment placed in service in 2026 or later — the OBBBA termination is a hard December 31, 2025 cutoff; do not advise clients based on the pre-2025-law expectation of a credit running through 2032/2033.
'Placed in service' (fully installed and operational), not purchase or contract date, determines the applicable tax year.
For 2025 installs specifically, the heat pump must meet the CEE's highest non-advanced tier AND be from a qualified manufacturer with a reportable QMID, or the credit is fully disallowed — an ENERGY STAR label alone is not sufficient.
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