Over 3.4 million taxpayers have benefited from $8.4 billion in energy credits. As August air-conditioning bills mount, many homeowners are considering residential energy investments for home improvements.

The Internal Revenue Service (IRS) announced that 1.2 million taxpayers claimed more than $6 billion of residential clean energy tax credits. Over 2.3 million taxpayers received $2.1 billion in credits for home energy improvement projects.

The residential energy credit went to 750,000 homeowners who installed solar rooftop panels. About 700,000 taxpayers improved their homes with insulation or other types of energy enhancements.

Treasury Secretary Janet Yellen stated, "The law has lowered the cost of clean energy upgrades for more than 3.4 million American families, saving them hundreds, if not thousands, of dollars annually on their utility bills for many years to come."

The IRS website explains there are requirements and limits for home energy credits. There are also specific rules for the residential clean energy credit or the efficient home-improvement credit.

1. Home Energy Tax Credits — Homeowners may claim a credit for their primary residence. Some renters and owners of second homes may also qualify. The specific details on energy credits are explained on energy.gov. The residential clean energy credit generally involves solar, fuel cells or batteries and is 30% with no lifetime or annual limit from 2022 to 2032. For most taxpayers, the energy efficient home-improvement credit for 2023 through 2032 is 30% up to a maximum of $1,200. However, there is an additional potential $2,000 credit for heat pumps, biomass stoves and boilers.

2. Residential Clean Energy Credits — The nonrefundable residential clean energy credit is not limited, except for fuel cells. The fuel cell limit is $500 for each half kilowatt of capacity. The credit applies to both owners and renters of their main home. The credit is normally applied to solar photovoltaic panels, but may also include solar water heaters, wind turbines, geothermal heat pumps, fuel cells and battery storage. Homeowners who receive any rebates or subsidies will need to subtract those amounts from the qualified expenses. Battery storage qualifies if there is a capacity of 3 kilowatt hours or greater.

3. Energy Efficient Home Improvement Credit — The efficient home credit is generally 30% up to $1,200 for most improvements and 30% up to $2,000 for heat pumps, biomass stoves and boilers. You must be modifying your main residence, and it must be located in the United States. The building components must have a lifespan of at least 5 years. Energy Star exterior doors or windows and skylights may qualify. Insulation and air ceiling materials must meet the International Energy Conservation Code (IECC) standards. A home energy audit with a written report by a home energy auditor qualifies for a $150 credit. The residential energy items could include central air-conditioners, natural gas, propane or oil water heaters or furnaces and boilers that meet Consortium for Energy Efficiency (CEE) standards. If there are any subsidies or rebates, those must be subtracted before calculating your credit.

IRS Will Restart ERC Payments

In IR-2024-203, the IRS announced it is planning to start making employee retention credit (ERC) payments. The IRS previously announced a moratorium on ERC payments submitted after September 14, 2023. The moratorium was designed to allow the IRS to study and make provisions for identifying which ERC claims are valid and which ones are fraudulent.

IRS Commissioner Danny Werfel stated, "The Employee Retention Credit is one of the most complex tax provisions ever administered by the IRS, and the agency continues working hard to balance our work to protect taxpayers from improper claims while also making payments to qualifying businesses. It has been a time-consuming process to separate valid claims from invalid ones. During the past year, we maintained a steady cadence of both ERC approvals and disapprovals."

The IRS recently sent 28,000 disallowance letters to businesses. It also has identified 50,000 valid ERC claims and is moving those into the payment pipeline.

The ERC was created during the COVID-19 pandemic. However, the prospect of government grants of money has been tempting for promoter groups that have filed thousands of unqualified claims. The level of fraud in ERC claims caused an IRS payment moratorium.

Commissioner Werfel continued, "Unfortunately, the situation was compounded by misleading marketing flooding businesses to claim these credits, creating a perfect storm that added risk of improper payments for taxpayers and the government while complicating processing for the IRS and slowing claims to legitimate businesses."

The IRS now plans to recommence payments. The 50,000 initial approvals are expected to begin distributions in September. Additional payments would be made in subsequent weeks.

The IRS claims it will focus its work on the highest risk and the lowest risk claims. Previously, the IRS announced both a withdrawal program and a voluntary disclosure program. There were 7,300 entities that withdrew claims totaling $677 million. During the voluntary disclosure period, there were 2,600 applications that disclosed $1.09 billion of credits.

The IRS has also initiated 460 criminal cases. The IRS Criminal Investigation section notes that the 460 cases include potentially fraudulent claims with a value of $7 billion. There have been 37 individuals charged with a federal offense. These charges have resulted in 17 convictions and the 9 sentences with an average of 20 months for their ERC fraud.

Editor's Note: Tax professionals for the 28,000 individuals who received the denial letters note that some denials were not based on correct information. Because the IRS may have limited information or the claim was filed by a disregarded entity, there are legitimate businesses whose ERC claims were denied. Individuals whose tax advisers believe they qualify for an ERC payment may file an appeal with the IRS Independent Office of Appeals or they may file suit in a U.S. District Court or the Court of Federal Claims. The IRS acknowledges that there was an omission in the denial letters. It published a statement that stated, "We understand that some of the recent early mailings have inadvertently omitted a paragraph highlighting the process for filing an appeal to the IRS or District Court, and the agency is taking steps to ensure this language is mailed to all relevant taxpayers."

Auyahuasca Tea Church Seeks Tax Exemption

The U.S. District Court and the D.C. Circuit have previously held that Iowaska Church (ICH) lacked standing to pursue a claim against the IRS for denial of its tax-exempt status. ICH had claimed that the denial of the tax exemption is an impermissible burden under the Religious Freedom Restoration Act of 1993.

Recently, ICH petitioned for a rehearing en banc and stated, "Outside this Circuit, the law is clear: an entity denied 501(c)(3) status has Article III standing to sue the IRS to reverse that denial. Yet, the panel held that ICH lacks Article III standing to challenge its 501(c)(3) denial in the context of a [Religious Freedom Restoration Act] claim."

In January 2019, ICH requested Section 501(c)(3) tax-exempt organization status. The IRS denied the application in June 2021 because the consumption of the ayahuasca hallucinogenic tea involved a controlled substance containing dimethyltryptamine. Therefore, because it did not have an exemption under the Controlled Substance Act for consumption of dimethyltryptamine, the District Court and the D.C. Circuit determined that it lacked standing to pursue an action under the Religious Freedom Restoration Act.

ICH now claims that the U.S. Supreme Court decision in Loper Bright Enterprises, Inc. v. Raimondo, No. 22-451 requires a rehearing by the D.C. Circuit en banc on the basis that deference cannot be given to the IRS on the question of whether the sacrament is a sincere exercise of its religion.

Applicable Federal Rate of 5.2% for August: Rev. Rul. 2024-15; 2024-32 IRB 1 (16 July 2024)

The IRS has announced the Applicable Federal Rate (AFR) for August of 2024. The AFR under Sec. 7520 for the month of August is 5.2%. The rates for July of 5.4% or June of 5.6% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2024, pooled income funds in existence less than three tax years must use a 3.8% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”