Understanding the Geothermal Tax Credit Extension

Congress recently approved an extension of federal tax credits for both residential and commercial installations of Geothermal Heat Pumps (GHPs) and several other alternative energy based solutions. These tax credits were initially introduced as part of the Energy Improvement and Extension Act of 2008, but with the exception of solar and wind energy credits the tax benefits ended at the close of 2016.

Since then there has been a strong push to bring geothermal and other renewable energy types back into the tax credit program to offer the same incentives as solar and wind. Congress finally approved an extension through 2022 as part of the $320M Bipartisan Budget Act that was passed on February 8th, 2018.

How Does the Geothermal Tax Credit Affect Me?

This credit is meant to incentivize home and business owners to install geothermal heat pump based climate control systems, instead of more traditional oil, electric or natural gas systems. It specifically covers the cost of equipment and installation, so this will generally affect people who are installing new climate control or replacing older systems.

In short, a taxpayer can claim a tax credit of 30% of “qualified expenditures” for the installation of a system in their home. These qualified expenditures include equipment, labor costs for on-site preparation, assembly for original system installation, and piping or wiring to interconnect a system to the home. For businesses, the tax program limits the credit to 10% of the qualified expenditures, presenting a lesser, but still compelling incentive for commercial installations.

So, if you are considering adding or replacing a climate control system in your home or business, you should consider a geothermal heat pump if you haven’t already. GHPs are a renewable heating and cooling solution that saves money on energy bills, with the only real downside being a higher initial cost of equipment and installation. The tax credit incentive helps to defray the issue of the initial cost and makes this one of the most economical solutions for many homes.

Getting into the Details of the Geothermal Tax Credit

The extension, while passed on February 8th, 2018, is retroactively effective as of Jan 1, 2017, so the credit applies to any systems installed in 2017, and will continue until December 31st, 2021. The residential tax credit will remain at 30% of qualified expenditures until January 1st, 2020, when it will drop to 26%, then on January 1st, 2021 it will drop again to 22%. The program will finally sunset on December 31st of 2021, unless it receives another extension. The 10% business credit, on the other hand, will remain static until it sunsets at the end of 2021.

One important detail has been changed from the original tax credit program as it relates to commercial GHP installations. The original wording stated that the program applied to any installations that were “placed in service” during the program period, meaning that any projects needed to be completed and the premises occupied before the program ended in order to qualify. The new wording allows for any projects that begin within the tax credit window, meaning that any projects that start before the end of 2021 will qualify, even if the premises isn’t occupied until 2022 or later.

How Do I Apply for the Geothermal Tax Credit?

We aren’t licensed tax accountants, so we’re legally required to tell you that we can’t offer tax advice and to seek the help of a professional! Please do that, so that you are 100% clear on the requirements and process for claiming the tax credits. That being said, the basics are pretty simple and should at least get you started.

If you qualify for the program, simply complete and submit Form 5695, which is also the best source for detailed information on the program (https://www.irs.gov/Form5695). Remember to also include the credits on your personal tax return. If you have already filed a return, you will need to file an amended return (Form 1040X) to claim the credits.

Our comfort specialists are available to help you understand how GHPs and the tax program will affect your home and save you money. We even offer a cost analysis so you can find out how much switching to a geothermal system will save you each year.