The federal government has instituted two types of incentives to convert conventional HVAC systems to geothermal or to install new geothermal systems. Tax credits are deducted from your tax bill; tax deductions are reductions in the gross amount of income on which the tax is calculated. The tax deduction is for commercial properties only.
Residential and commercial building owners who install geothermal heating and cooling systems are eligible for federal financial tax credits under the Energy Improvement and Extension Act of 2008. The incentives were enhanced in February 2009 by the American Recovery and Reinvestment Act, through elimination of the residential $2,000 maximum credit allowance (cap).
As of October 3, 2008, geothermal heat pumps are now included within the definition of “energy property,” along with solar, fuel cell, and wind technologies. Qualifying geothermal heat pump property is equipment that uses the ground or groundwater as a thermal energy source to heat a structure or as a thermal energy sink to cool a structure.
Residential Renewable Energy Tax Credit
Homeowners are eligible for a 30% federal income tax credit towards the cost to install qualified geothermal heat pump property at their home, with no cap. The home must be located in the U.S. and be used as a residence by the taxpayer, although need not be the primary residence. If the installation is at a new home, the “placed in service” date is the date of occupancy by the homeowner.
Business Energy Investment Tax Credit (ITC)
Tax-paying commercial, industrial, and agricultural building owners are entitled to a 10% federal tax credit towards the total investment cost to install a qualified geothermal heat pump system, with no cap. Under the federal Modified Accelerated Cost-Recovery System (MACRS), business owners are additionally eligible for accelerated depreciation deductions over a five-year period following purchase.
Requirements and Filing
To apply for the credit, a system must be placed in service after December 31, 2008, and before January 1, 2017, and must meet federal Energy Star® program requirements in effect at the time the expenditures are made. Costs include labor for on-site preparation, assembly, or original system installation, and for piping or wiring to interconnect a system to the home or building. The original use of the property must begin with the taxpayer, or the system must be constructed by the taxpayer.
If the federal tax credit exceeds tax liability, the excess amount may be carried forward to succeeding taxable years until 2016, but it is unclear whether the unused tax credit can be carried forward after then. The credit can be taken against the alternative minimum tax (AMT), subject to certain limitations, and the equipment must be operational in the year in which the credit is first taken.
Owners can file for these tax credits by completing the Renewable Energy Credits subsection on their tax return forms. No proof of purchase is required. However, in case of an audit, owners are encouraged to keep a detailed invoice of their purchase on file. The contractor who sold and installed the product should list the purchase as a “Geothermal Heat Pump” on the invoice and note that the unit “Exceeds requirements of the Energy Star program currently in effect.”
To learn more about the above federal tax credits and how to apply, see: http://www.energystar.gov/index.cfm?c=tax_credits.tx_index.
As part of the Energy Policy Act of 2005, commercial building owners can take a federal tax deduction of up to $1.80 per square foot of the building’s floor area to make improvements that reduce energy usage. This deduction is known as Energy Efficient Commercial Building Deduction (EPAct). Improvements need to be a part of the building’s interior lighting systems, heating, cooling, ventilation, hot water systems or building envelope. A geothermal heat pump system is one of the technologies well suited to contribute to a building’s overall energy usage reduction, thus can be used towards achieving the EPAct deduction.
The deduction is allowed for both new construction and remodeling and the building must be placed in service between 2006 through 2013. To achieve the maximum $1.80 deduction, energy costs must be reduced by at least 50 percent when compared to a reference building as detailed in ASHRAE Standard 90.1-2001, Energy Standard for Buildings Except Low-Rise Residential Buildings (effective April 2, 2003). If a building comes in under 50 percent, it may still qualify for a deduction of $.60 or $1.20 per square foot by looking at individual measures implemented.
This incentive is a deduction rather than a tax credit, meaning that the cash benefit is calculated by multiplying the deduction times the tax rate, which is usually 35%.
Examples of energy-efficient building materials and systems other than geothermal heat pump systems that can contribute towards achieving the EPAct deduction include:
- High-efficiency insulation in walls, ceilings and floors
- Automatic thermostats, lighting controls and other monitoring equipment
- Energy-efficient fixtures
- Ultra-efficient air conditioners and furnaces
- High-performance glazing and other energy-efficient materials on the building envelope
- Natural ventilation
- Improved fan efficiency
A special rule allows a governmental entity to assign the deduction to the person primarily responsible for designing the building, such as architects or engineers. Similarly, the deduction may be assigned to contractors for designing and choosing efficiency upgrades. Thus, if you are involved in the design of a community center, public educational facility, municipal parking garage, or other government building, you may qualify for the deduction.
An independent, qualified individual must verify and certify that the property installed satisfies specific energy-efficiency requirements using IRS-approved software.
For more information on EPAct, visit: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Commercial-Property-Owners-and-Leaseholders-Qualify-for-Energy-Efficiency-Tax-Deduction.
Note: The above is provided for information only. Individuals should check the specific provisions of the federal laws, including limitations, and consult with legal or tax counsel relative to the tax provisions and their applicability.