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Tax Incentives for Contractors

Improving ventilation, heating, and cooling is a top priority for building owners. Relevant stakeholders seek to balance HVAC upgrade desires with the economic concerns of today including higher inflation, supply chain squeezes, and increased costs of equipment. 

Luckily, several tax benefits are available for homeowners (and contractors) looking to modernize their homes to reduce costs and promote improved living conditions. Three such benefits contained within the Internal Revenue Code are contained within Section 25D, which provides incentives for homeowners to install home systems that draw upon renewable energy, Section 45L, which provides incentives for contractors to construct homes that meet specific energy efficiency standards, and Section 179D, which enables tax deductions for owners who make building infrastructure improvements that demonstrate a 50 percent reduction in energy usage. HVAC improvements are a primary focus of this deduction.


section 25D

This rule allows for the use of renewable energy tax credits for renewable energy-based systems, including geothermal heat pumps.

Homeowners can claim this tax credit if a renewable system is utilized within either an existing home or in new construction. The residence must serve as a primary dwelling; rentals do not qualify.

The credit structure is as follows:

  • 30% for systems placed in service by 12/31/2019;
  • 26% for systems placed in service after 12/31/2019 and before 01/01/2023;
  • 22% for systems placed in service after 12/31/2022 and before 01/01/2024;

Homeowners can claim these deductions by filing IRS Form 5695 with their tax return. Please note that this tax deduction is available until December 31, 2023. 

Additional Information:
EnergyStar Guidance on the 25D Renewable Energy Tax Credit


Section 45L

This rule allows contractors to claim a tax benefit for new homes built to specific energy efficiency standards.

Contractors can claim this tax credit of $2,000 per dwelling unit ($1,000 for manufactured homes) for each new energy-efficient (meeting or exceeding current EnergyStar standards) home that is constructed. Savings achieved through the inclusion of energy-efficient features include 

  • High R-value insulation and roofing,
  • High-efficiency HVAC systems,
  • Modernized Windows and Doors. 

For your project to qualify, a complete energy analysis must be conducted by an engineer. Once the certification is finished, and the engineer provides a 45L certification, you will receive a certification package containing all of the needed documentation to submit to the IRS.

Please note that this credit must be claimed on your 2021 (filed in 2022) tax return.

EnergyStar Guidance on the 45L Efficient Homes Tax Credit



This rule allows a deduction of up to $1.80 per square foot is available if improvements are made that visibly demonstrate a 50% reduction in energy usage accomplished solely by making capital improvements to the heating, cooling, ventilation, hot water, and interior lighting systems.

Eligible buildings include:

  • Commercial buildings, including warehouses and parking garages;
  • Multifamily properties with four stories or more;
  • Government-owned buildings, such as public universities, libraries, and community centers.

Building owners can claim this tax deduction if:

  • They can demonstrate the necessary reduction in energy usage accomplished through improving these systems.

To qualify, owners must have a third-party (separate from the project’s designer) conduct a Section 179D survey utilizing appropriate measurement software that has been approved by the Department of Energy.

Contractors can claim this deduction if:

  • They have input into the design or are contractually obligated to participate in the design process. This is specifically true when a contractor is engaged in a government project and are responsible for any design work.

Please note: only projects completed after December 31, 2017, are eligible.

Additional Information:
EnergyStar Guidance on the 179D Deduction