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How the Inflation Reduction Act Energy Initiative Impacts Contractors in 2023

The federal government signed the Inflation Reduction Act (IRA) into law on August 16, 2022. This sweeping piece of legislation allocated hundreds of billions of dollars to combat climate change through the development of clean energy projects and efforts to cut carbon emissions.

The Inflation Reduction Act is unquestionably the largest investment in clean energy in the nation’s history. The bill’s impact has implications for several industries, and businesses in the HVAC space will need to inform themselves to succeed moving forward. This article explains what contractors need to know about how the Inflation Reduction Act may impact their businesses.

Understanding the IRA and Breaking Down Key Programs

The Inflation Reduction Act offers several tax credits to incentivize homeowners, manufacturers, and contractors to increase by reducing carbon emissions and sustainably improving energy efficiency. Contractors should note how these changes make upgrading HVAC systems significantly more affordable to households across the income spectrum and will result in higher demand for new products and installation services. These changes apply to installing high-efficiency HVAC systems in residential and commercial properties. Review the changes below:

Energy Efficient Home Improvement Tax Credit (25C)

Previously known as the Nonbusiness Energy Property Credit, the 25C credit was updated as part of the IRA. Beginning in 2023, the tax credit will be equal to 30% of the cost for eligible home improvements made from January 1, 2023 – December 31, 2032. The credit has an annual cap of $1,200 ($600 for a qualified air conditioner or gas furnace) or up to $2,000 with a qualified heat pump, heat pump water heater, or boiler. The new 25c is an annual credit rather than a one-time credit, as was previously the case.

High-Efficiency Electric Home Rebate Act (HEEHRA)

This act aims to enable low-to-moderate-income households to electrify their homes. This voluntary program covers all the electrification project costs up to $14,000 for low-income households and covers half the costs for middle-income households. These projects include heat pump HVAC systems and water heaters, electric stoves, heat pump clothes dryers, upgrading circuit panels, insulation, ventilation, and wiring.


Originally passed in 2005, the 45L tax credit allows eligible contractors to claim a $2,000 tax credit for constructing (or reconstructing) energy-efficient residential and commercial buildings. Initially, low-rise residential developments were the only ones eligible for this credit, but residential developments will be eligible beginning in 2023. In the IRA, the credit is extended through 2032m with changes to qualifying standards beginning in 2023 when the credit transitions to the Energy Star criteria. Key details include:

· Beginning in 2023, new homes certified under the Energy Star programs will be eligible for a $2,500 tax credit.

· The credit is increased to $5,000 for dwelling units certified under the Zero Energy Ready Homes Program (ZER).

· For multifamily units, the base qualification decreases to $500, while ZER multifamily units are $1,000 each.

· Multifamily units meeting prevailing wage requirements will receive an increased $2,500 credit for base qualification and $5,000 for ZER.

179D Deduction

The 179D deduction became a permanent piece of legislation in the Consolidated Appropriations Act in 2021. The IRA significantly changes the deduction amounts and qualification criteria. The IRA extended the deduction of up to $1.88/SF to December 31, 2022, and it will increase beginning on January 1, 2023. In fact, the new deduction will be increased to $5/SF if it meets two new requirements.

First, the prevailing wage requirement necessitates that any laborers employed by taxpayers, or any contractor or subcontractor employed in the installation of any property, shall be paid wages the same or higher than prevailing rates for construction of any similar job in the locality. The second requirement states that a certain percentage of labor hours are to be performed by a qualified apprentice in a registered program.

HOMES Program

The HOMES Program provides up to $4.3 billion to states to create and administer incentives based on energy reduction measures. This will undoubtedly have a major impact on the way states and utilities invest in cleaner energy.

Expect New Customer Demands

Millions of commercial and residential properties will be installing energy-efficient HVAC systems in the immediate future because of the new incentive structure outlined in the bill. One of the largest rebates, for example, focuses on upgrading heat pump technology for heating and cooling.

Heat pumps are more energy-efficient than standard air conditioning units, and the IRA offers up to a 30% tax credit (up to $2,000) when property owners purchase and install these systems. As a result, Contractors should prepare for a sharp increase in heat pump installations in 2023. Heat pumps can also power appliances like water heaters and clothes dryers, further incentivizing homeowners to make the transition.

In addition to heat pumps, service-based incentives like energy audits – which give homeowners a $150 credit – may increase in demand. Contractors who market these services to property owners can benefit from the initial service charges and the relationships they develop along the way.

Review this site for a full list of federal income tax credits and incentives for energy efficiency.

Additional Ways Contractors Can Benefit from the Inflation Reduction Act

Aside from an overall increase in business from commercial and residential property owners looking to improve overall energy efficiency, contractors have a unique opportunity to expand their range of services.

For example, investing in technology incentivized by the IRA, such as solar energy, can pay major dividends in the coming decade. The Solar Investment Tax Credit (ITC) gives residential homeowners who install designated energy systems before the end of 2032 a tax credit of 30% of the cost from their federal income taxes.

While not everyone will adopt renewable energy sources for their home, these significant financial benefits will likely create a whole new group of customers. HVAC contractors who take the initiative can capture a piece of this new market by preparing for the future of energy consumption.

Contractors Can Capture Market Share Through Education

Contractors who are well-versed in IRA tax incentives, and can convey them to potential customers, will have an advantage over their competitors. The legislation marks a once-in-generation opportunity for HVAC contractors to grow their businesses, as experts expect tens of millions of new heat pump installations in the coming years. These predictions indicate exponential growth in the overall new HVAC equipment and installation services market. Contractors should leverage tax incentives to capture their share of this expanding market.

In addition to incentivizing customers to transition to more efficient systems, the IRA allocated $200 million to educate contractors and help them prepare for the increase in demand. State-Based Home Energy Efficiency Contractor Training Grants provide financial assistance to states to train and educate contractors who install energy efficiency optimizations and electrification improvements (improvements eligible for rebates under a HOMES rebate program or a high-efficiency electric home rebate program).

Visit for a comprehensive overview of the IRA’s impact on energy.

Prepare for the Future with Johnstone Supply

While contractors navigate the industry changes in the wake of the Inflation Reduction Act, we’re here to help the transition go as smoothly as possible. We supply SEER2-compliant machines and parts, and we are here to support, train, and educate HVAC industry workers on the latest equipment and techniques.

Contact us online or stop by a Johnstone Supply store near you to see how we can help your business succeed by providing the products and insight you need to succeed.


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