Heat Pump Rebate and Inflation Reduction Act: Purchase in 2022, installed in 2023?

[cphiferc]

Hello TurboTax Team:

We plan to upgrade our heating and cooling with an energy efficient heat pump. Our local installer gave us a bid in October '22, but warned that the installation wouldn't be until March '23. My question is about the rebates and discounts that are a part of the IRA. If I sign a contract now in October so I can reserve my spot for installation in March '23, can I take advantage of the increased rebate? Or should I wait until January '23 to sign the contract. (If if matters, payment is due at the time of installation.) 

I imagine a lot of folks are going to want to do this work in the future, and we want the cooling more than the heating, so it's OK for us to wait a bit.

Does anyone understand the details of the IRA and timing of purchasing vs. installation?

Thank you!

[tagteam · Accepted solution]

Typically, the timing would involve having paid for the asset (via cash, credit card, loan, et al) and having placed the asset in service during the tax year. 

Merely signing a contract is probably not sufficient to disqualify you for the credit but, hopefully, someone else can respond who is familiar with the details of the Act.

[Opus 17 · Accepted solution]

The credit is claimed when the unit is placed in service (installed, inspected, and ready to turn on) regardless of when it is paid for or when the contract is signed.  In your case, that is going to be 2023.   You would fall under the 2023 rules and claim the credit on your 2023 tax return. 

[cphiferc]

Thanks you everyone for the advice!!! The tax credit covers about a third of the cost of the heat pump, so we didn't want to loose that. 

[corelema]

Hello, thanks for the info!

Do you know what happens if the heat pump was installed at the end of December, and the inspection was done in early January?

Would the date when it was turned on be the date that matters?

Thanks!

[PattiF]

The IRS says that the credit can be used when the unit is installed.

@corelema 

[Opus 17]

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@corelema wrote:

Hello, thanks for the info!

Do you know what happens if the heat pump was installed at the end of December, and the inspection was done in early January?

Would the date when it was turned on be the date that matters?

Thanks!

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I don't know if there is a definitive answer.  The law says, 

"(A)In general

Except as provided in subparagraph (B), an expenditure with respect to an item shall be treated as made when the original installation of the item is completed."

The question is, is installation "complete" if the property is installed, but hasn't been inspected?  Suppose the inspector finds no errors, then maybe the installation was complete in December.  But suppose the inspector finds an error and the installer has to come back; in that case, installation wasn't complete.  

In other parts of the tax code, property must be "placed in service" which means installed, inspected, and turned on or placed in use.  But that specific wording is not included in the energy property credits.

I don't know if there have been any audits or tax court cases on this specific issue.  I think you could reasonably look at it either way, depending on how you want to file.  But I would consider there to be a slight risk that, if audited, the auditor might look at the inspection date instead of the installation date.