There are several State and Federal incentive programs for geothermal heating and cooling systems for new and retrofit commercial buildings. These incentives can amount to over 50% of the fully installed cost over the first five years. Commercial incentives can appear a bit complex at first glance but their implementation is fairly straightforward once you sort it out.
The Energy Tax 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. 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.
Grant as Alternative
All commercial and private buildings are eligible for a 10% US Treasury Grant in lieu of tax credit for geothermal projects started before the end of 2011. A check is written from the government to the geothermal system owner within 60 days of web-based submission after the project has been placed in service. This option is provided as alternative in order to decrease the amount of tax liability needed to offset if taken as a tax credit. Eligibility requirements for the Treasury Grant are the same as requirements for the tax credit.
Accelerated Depreciation Benefits
Under The American Recovery and Reinvestment Act of 2009, businesses have the ability to enhance tax savings by accelerating depreciation on a geothermal system. 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 40% tax bracket, the MACRS depreciation provides additional tax savings equal to 38% 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.
100% Bonus Depreciation for 2011 and 50% for 2012
In December of 2010 Job Creation Act permits businesses to fully expense the cost of qualified property placed in service until the end of 2011. For properties placed in service through the end of 2012 it is permitted to expense 50% in the first year and follow the MACRS basis described below for the balance.
Energy Efficient Commercial Buildings Tax Deduction
A Federal tax deduction of $1.80 per square foot is available to building owners of new or existing buildings who install (1) interior lighting; (2) building envelope, or (3) heating, cooling, ventilation, or hot water systems that reduce the building’s total energy and power cost by 50% or more in comparison to minimum requirements set by ASHRAE Standard 90.1-2001. Deductions of $0.60 per square foot are available for lighting, building envelope, or heating and cooling systems that provide at least 1/3 of the 50% savings target. Energy savings must be calculated using software approved by the IRS.
New Construction Program
The New Construction Program may aid your project with technical assistance to evaluate and design energy efficiency options, cash back for installation of cost-effective electric efficiency measures including geothermal heating and cooling in new or substantially renovated buildings. Additional incentives are also available for green buildings, solar technologies, industrial and process efficiency, and demand response.
Financial incentives are based upon the anticipated energy performance of the building relative to the Energy Code requirements. Actual incentives are based upon the anticipated energy performance of the building. Incentives cover a significant portion of the incremental costs of energy efficiency measures. Incremental costs are defined as the cost difference between the installed high efficiency equipment and the equipment that meets Energy Code requirements.
Existing Facilities Program
Existing Facilities Program offers incentives for a variety of energy projects including Pre-Qualified Measures and Performance-Based Incentives depending on the size of the project and the anticipated amount of incentive.