Now, the decision to install solar panels, heat pumps, and energy-efficient upgrades has been a long-standing combination of environment and savings for California homeowners. But the end of key federal clean energy tax credits has altered the economic landscape.
California’s climate policies support electrification and energy efficiency, but no longer can homeowners expect to make up for going green if they make it more expensive by trying to cover the federal tax incentive. Look for an expert who can help with Los Angeles tax resolution.
The Expiration of Federal Clean Energy Tax Credits
The Inflation Reduction Act (IRA) provided welcome incentives for energy efficiency upgrades in homes. Two key points were:
- Section 25C: The Energy Efficient Home Improvement Credit, which included energy-related improvements like certain energy-efficient equipment, heat pumps, insulation, and windows.
- Section 25D: The Residential Clean Energy Credit to benefit eligible residential solar, battery storage, geothermal, and other clean energy projects.
These residential credits were phased out for eligible costs as of December 31, 2025, under the federal changes that were made in 2025. Typically, these tax credits are not available for homeowners who install them in 2026.
The timing is even more important to people living in California. The cost of energy upgrades can be high even without the federal incentives, due to rates and building needs caused by climate change. Hiring a professional is the best way to deal with federal payroll tax penalties.
What Makes This Challenging?
California’s climate mandates and energy policies remain proponents of efficient buildings, electrification, and renewable energy.
Rooftop solar is not as lucrative as it was under the previous state policy, the Net Energy Metering (NEM 2.0), which is now followed by NEM 3.0.
The new compensation regime typically provides lower payments for solar export to the grid to new solar customers than previous programs did. Instead, it may be more valuable to homeowners to use their solar energy as they generate it or to store it in batteries.
With the expiration of federal credit, these investments become more difficult to make a financial case for.
The solar panel installer, who is also a homeowner, installing a battery and heat pump, may find that they have to deal with a higher initial cost and not only reduced export compensation, but also the changing availability of incentives.
Can State Incentives Help?
Federal residential credits are no longer available, but homeowners in California may be able to get help from state and local programs.
The Self-Generation Incentive Program (SGIP), for instance, provides incentives for qualified energy storage systems. Some programs are geared towards energy access issues or eligibility.
Other utility and local programs may provide benefits for a heat pump or weatherization or electrification project. These are available, funded, and eligible in various ways and need to be confirmed by homeowners before they enter into an installation. Don’t forget to consult with a professional regarding an IRS payroll audit before making any major decision.
The incentives offered in California are not necessarily the same as the previous federal credits. A homeowner must determine the balance due cost instead of assuming state programs will cover the federal loss of benefit.
Transition Deadlines: Did Your Installation Qualify?
If the installation was done around December 31, 2025, homeowners need to take time to check their paperwork.
The IRS has different timing rules for the two credits:
- The qualifying property was, in general, required to be put into service by December 31, 2025.
- Historically, the installation was required to be done by December 31, 2025, for the original installation. If the installation was not completed until after the payment deadline, money was not deemed paid until that time.
The IRS expressly states that prepayment will not yield a credit for Section 25D when the installation is completed in 2026.
A homeowner is required to keep invoices, installation records, permits, manufacturer certifications, and payment receipts to prove eligibility.
Suggestions that May Be Useful:
When beginning a “green” home improvement project:
- Compare solar-only systems with solar and battery systems based on your utility’s existing rate structure.
- Make sure to research SGIP and local utility incentives before entering into a contract.
- Request documentation of installation dates and equipment eligibility.
Check if the cost of financing electricity is greater than expected electricity savings.
Speak with a tax advisor about federal credit eligibility or carryover requirements.
California’s clean energy transition will keep going, and the payments are different. For those who are not eligible for federal residential credits, homeowners should consider efficiency, heat pumps, and solar energy based on utility savings, state incentives, and the property’s long-term benefits. With careful planning, it is possible to prevent costly surprises and ensure that energy improvements are financially viable.
