to Geothermal Heat Pump Installations
The federal government currently offers tax credits and tax incentives for geothermal heat pump (GHP) system installations. Following are basic descriptions of those credits and incentives.
GHP Tax Credits for System Installations
The federal government offers tax credits specific to the buyer/owner of the GHP system. These credits were passed into law in 2008 and expanded in 2009.The tax credits cover both GHP equipment and the ground heat exchange system, including installation cost. Both of these tax credits, for commercial and residential installations, are set by law to end on Dec. 31, 2016. To claim the credits, GHP installations must be "placed in service" prior to that date.
Commercial Tax Credit. For commercial GHP projects, the law currently allows owners an Investment Tax Credit (ITC - designated under IRS Code Sec. 48[a]) that is equal to 10% of qualified expenditures for GHP systems installed in commercial buildings. GHPs are also included as a technology that is classified as a five-year property under the Modified Accelerated Cost Recovery System (MACRS). GHP classifica-tion under the MACRS is tied to being a technology listed in 48(a).
Residential Tax Credit. For residential GHP projects, the law currently allow individuals to claim an income tax credit (under IRS Code Sec. 25D) that is equal to 30% of qualified expenditures for installation of an Energy Star-rated GHP at their residence. This tax credit also applies to second homes.
Extension of GHP Tax Credits Beyond 2016. The Geothermal Exchange Organization (GEO) is working to extend the current GHP tax credits through 2022 with a tiered phase-out, like the extension granted to the solar industry in the Omnibus government spending bill passed by Congress and signed by the President on Dec. 18, 2015.
That legislation extended the solar industry Investment Tax Credit (ITC for commercial projects) until Dec. 31, 2019 in its current form. After that, projects that start construction in 2020 and 2021 will receive 26% and 22% tax credits, respectively. All projects must be completed by 2024 to obtain the elevated ITC rates. For residential solar, a similar tax credit phase-out applies until Dec. 31, 2021, after which the credit ends.
GHPs and other eligible technologies in 48(a) (fuel cells, micro turbines, geothermal electric, direct use geothermal, small wind and combined heat and power) with tax credits expiring at the end of 2016 were left out of the Omnibus bill due to what some are calling a drafting error. GEO expects the situation to be corrected by legislation in early 2016, and that GHPs will enjoy the same extension and phase-out of both commercial and residential tax credits that now apply to solar.
Business Tax Incentives Applicable to GHPs
The federal government also offers general tax breaks for businesses that can be applied to GHP system installations. There are four such incentives that have direct relevance to GHPs. In recent years these incentives have been repeatedly extended for short periods of time, and the bills used for that purpose have been called “tax extenders.” The four incentives affecting GHPs were modified as described below in a comprehensive tax extenders bill passed along with the Omnibus spending bill on Dec. 18, 2015, and signed by the President.
Bonus Depreciation. Business taxpayers are allowed an additional first-year depreciation deduction of 50% (bonus depreciation) on the cost of commercial GHP equipment that is placed into service during 2015, 2016 and 2017. The bonus depreciation then phases down, with 40% in 2018, and 30% in 2019. The provision continues to allow taxpayers to elect to accelerate the use of Alternative Minimum Tax (AMT) credits in lieu of bonus depreciation under special rules for property placed in service during 2015. The provision modifies the AMT rules beginning in 2016 by increasing the amount of unused AMT credits that may be claimed in lieu of bonus depreciation.
Section 179 Business-Related Expensing. The tax provision permanently extends the small business expensing limitation and phase-out amounts to $500,000 and $2 million, respectively. The provision modifies the expensing limitation by indexing both the $500,000 and $2 million limits for inflation beginning in 2016, and by treating air conditioning and heating units (including GHPs) placed in service in tax years beginning after 2015 as eligible for expensing. The provision further modifies the expensing limitation with respect to qualified real property by eliminating the $250,000 cap beginning in 2016.
Energy Efficient New Homes. A contractor may take a credit for each new energy-efficient home used as a residence in calendar year 2016. Homes must meet a reduction in annual heating and cooling energy consumption compared to a comparable residence constructed in accordance with the International Energy Conservation Code. The credit is $1,000 for new homes that meet a 30% reduction in annual heating and cooling energy consumption, and $2,000 for new homes that meet a 50% reduction in annual heating and cooling energy consumption.
Energy Efficient Commercial Buildings The energy efficient commercial building deduction is available through 2016 for energy efficiency improvements to lighting, heating, cooling, ventilation, and hot water systems of commercial buildings. The improvements must be part of a plan to reduce total annual energy and power costs of a building by 50% or more compared to a building that meets minimum requirements for energy-efficient commercial building expenditures under American Society of Heating, Refrigeration and Air Conditioning Engineers (ASHRAE) / Illuminating Engineering Society of North America (IESNA) Standards. The deduction is $1.80 per square foot of property for which the expenditures were made, and is allowed in the year that the property is placed into service. Tribal governments and non-profit organizations can allocate the deduction to the person primarily responsible for designing a property.
IMPORTANT NOTE - This document should in no way be construed as tax advice. Your personal or business tax consultant can provide more details about how you might take advantage of the tax credits and incentives described above.