Geothermal Tax Credits
The Energy Credit
In October 2008, geothermal heat pumps were included to the definition of "energy property" under section 48(a) of the Internal Revenue Code. This created a 10% tax credit for costs associated with geothermal equipment "placed in service" (defined by the IRS as made ready and available for use) through the end of 2016. Geothermal equipment is classified as 5-year depreciable property under section 168(e)(3)(B)(vi)(I) of the Internal Revenue Code and can be deducted on an Modified Accelerated Cost Recovery System (MACRS) basis. The basis must be reduced by one half of the tax credit for depreciation purposes. For a corporation in a 35% tax bracket, the MACRS depreciation provides additional tax savings equal to 33.25% of the energy property spending within the first 5 years, with the greatest tax benefit at the beginning. Conventional heating and cooling systems, by comparison, usually depreciate over a 39-year straight line basis and would only provide 4.5% in tax savings over the first 5 years.
Equipment that uses the ground or ground water as an energy source for heating and cooling a building is eligible for the tax credit. The structure must be located in the United States and only its owner can claim tax credits or depreciation deductions. The taxpayer must take legal title of the equipment and have all necessary licenses and permits needed for its operation. If an owner can't use the tax credits, other options exist such as sale-Ieasebacks, partnership "flip" structures, or energy purchase contracts.
The credit can't be claimed for spending on equipment used for a purpose other than space conditioning, on previously used equipment, or on equipment that's used by tax exempt organizations like schools, government agencies, or charities. This also precludes tax-exempt entities from leasing energy property.
How to claim the Credit
Use IRS Form 3468 to claim the Energy Credit. The 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 one taxable year and the remaining balance can be carried into future years.