The Energy Credit

In August 2022, the 30% tax credit for geothermal heat pump installations was extended through 2032 and can be retroactively applied to installations "placed in service" on January 1, 2022 or later. Property is usually considered to be placed in service when installation is complete and equipment is ready for use. However, if the system is part of the construction or renovation of a house, it's considered placed in service when the taxpayer takes residence in the house. To save the most on your installation, you'll want to act quickly - this credit will drop to 26% in 2033 and 22% in 2034 before expiring altogether.

What's Eligible

Geothermal equipment that uses the stored solar energy from the ground for heating and cooling and that meets ENERGY STAR requirements at the time of installation is eligible for the tax credit. Covered expenditures include labor for onsite preparation, assembly, or original system installation and for piping or wiring to connect a system to the house. The structure must be located in the United States and used as a residence by the taxpayer, although primary residency isn't required. In fact, if geothermal is installed in more than one home, there's no limitation on the number of times the credit can be claimed.

What's Not

The credit can't be claimed for spending on equipment used solely for hot tub or pool conditioning, nor on previously used equipment. Rental home installations also cannot be claimed. As of November 2013, electric strip heat and ductwork distribution systems are no longer included in the tax credit calculation.

How to Claim the Credit 

Use IRS Form 5695 to claim the Residential Energy Efficient Property Credit. For property placed in service after 2009, there's no limit on the credit amount. The tax credit can be used to offset both regular income taxes and alternative minimum taxes (AMT). If the federal tax credit exceeds tax liability, the excess amount may be carried forward into future years. Spending on geothermal heat pump property adds to hour home's cost basis but also must be reduced by the amount of the tax credit received.

The energy tax credit can be combined with solar and wind credits as well as energy efficiency upgrade credits. A 30% federal tax credit for residential ground source heat pump installations has been extended through December 31, 2032. The incentive will be lowered to 26% for systems that are installed in 2033 and 22% in 2034, so act quickly to save the most on your installation.

• Check Out The Residential Tax Incentive Guide
• Energy Star Compliance Certificate

Thirty Percent Investment Tax Credit (ITC)

The Inflation Reduction Act1 has added new, changed and extended previously existing clean energy tax credits. The Section 48 energy Investment Tax Credit (ITC) allows owners to claim a tax credit for the cost of energy property placed in service during the tax year. Such energy property includes geothermal heat pumps (GHPs). Upon election, tax-exempt entities, state, local and tribal governments are also eligible for direct payments of the ITC. The ITC was extended with a 6% base credit and up to 30% when certain requirements are fulfilled. Geothermal projects under 1MW (approx. 284 tons) qualify for the 30% credit but the prevailing wage and apprenticeship requirements must be met for projects over 1MW, otherwise, the lower 6% base credit applies. The geothermal project must begin construction before Jan 1, 2035.

Ten Percent Credit for Domestic Content Projects

The Domestic Content bonus credit is for incorporating domestically manufactured products into ITC eligible projects. The Domestic Content bonus tax credit is 10% for projects less than 1MW. The bonus credit is 2% for larger projects unless the apprenticeship and prevailing wage requirements are met. For manufactured products, the domestic cost percentage must exceed 40% for the project to qualify for the domestic content bonus credit. The project must begin construction prior to January 1, 2035. The domestic content credit also applies to tax-exempt entities, state, local and tribal governments.

Ten Percent Credit for Energy Communities

The Energy Community bonus tax credit is for clean energy development in communities that have been sites of legacy energy production. The Energy Community bonus tax credit is 10% for projects less than 1MW. The bonus credit is 2% for larger projects unless the apprenticeship and prevailing wage requirements are met. The credit also applies to tax-exempt entities, state, local and tribal governments. The IRA defines energy communities as:

• A brownfield site (as defined in certain subparagraphs of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA))
• A "metropolitan statistical area" or "non-metropolitan statistical area" that has (or had at any time after 2009) 0.17% or greater of direct fossil fuel employment or 25% or greater local tax revenues related to the extraction, processing, transport, or storage of coal, oil, or natural gas; and has an unemployment rate at or above the national average unemployment rate for the previous year
• A census tract (or directly adjoining census tract) in which a coal mine has closed after 1999; or in which a coal-fired electric generating unit has been retired after 2009

EPAct 179D

This energy efficiency commercial building tax deduction applies to new and existing buildings that have been completed since Jan. 1, 2006. The buildings must meet certain American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) efficiency standards to qualify. It allows for a tax deduction in the year the property is placed in service. The deduction can be up to $5 per square foot for projects meeting prevailing wage and apprenticeship labor requirements with the amount depending on reduction of total annual energy and power costs for the building. With for-profit businesses, the deduction can be taken by the building owner. The deduction includes buildings owned by not-for-profit, instrumentalities, and Indian Tribal Governments. For not-for-profit organizations, the deduction can be taken by the designers of these buildings.

Who's Eligible for the Geothermal Tax Incentives?

Equipment that uses the ground or ground water as an energy source for heating and cooling a building is eligible for the Section 48 tax credit. The system must be in the United States and the tax incentives can benefit for-profit or not-for-profit organizations. After equipment is installed, the taxpayer must take legal title of the equipment and have all necessary licenses and permits needed for its operation. Starting in 2023, section 6418 allows for commercial taxpayers to transfer the credit to other taxpayers.

How to Claim These Tax Advantages Use IRS Form 3468 to claim the ITC. The Section 48 tax credit can be used to offset both regular income taxes and alternative minimum taxes (AMT). If the tax credit exceeds the income tax liability, the loss can be carried back 3 taxable years and the remaining balance can be carried into future years. Use IRS Form 4562 to claim 5-year MACRS depreciation and first year bonus depreciation. Commercial building owners can take the 179D for building projects completed since Jan 1, 2006. A standard form for 179D will be available within IRS Form 7205. To claim a 179D deduction, use the "Other" deduction line. IRS Form 3115 is used for catch-up on all prior year unclaimed EPAct 179D deductions. Designers of government projects must amend prior year returns and can only adjust the prior 3 years.

Check For More Local Incentives

In addition to the federal tax credit, some state, local, and utility incentives may be available in your area for even more savings on installing a geothermal heat pump. Check out the Database of State Incentives for Renewables & Efficiency (DSIRE) website to find policies and incentives in your area.

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