Inflation Reduction Act (IRA)

The Inflation Reduction Act (IRA), signed into law on August 16, 2022, substantially extends and enhances the federal income tax credits and incentives available for the installation of geothermal heat pump (GHP) energy property in commercial buildings, including the introduction of a new direct payment option for non-taxable entities.

For taxable businesses, there are also new carryback and transfer provisions along with a continuation of the accelerated depreciation benefits. These new incentives are unfortunately more complex in structure. This guide is designed to provide a detailed review of the new tax and depreciation incentives available for commercial GHP energy property under the IRA.

Geothermal Federal Income Tax Credits

• Investment tax credit (ITC) up to 30% of system cost basis
• Domestic content bonus tax credit up to 10% of system cost basis
• Energy community bonus tax credit up to 10% of system cost basis
• Direct-pay option for non-taxable entities
• No cap on total credit amount
• Can be used to offset AMT tax
• Can be used in more than one year
• Can be carried back up to 3 years or transferred/sold to an unrelated party
• Can be combined with solar and other clean energy tax credits
• Residential Tax Incentive Guide Brochure

Accelerated Depreciation

• 5-year MACRS depreciation of system cost basis (less ½ of tax credit)
• Eligible for first-year bonus depreciation

GHP System Eligibility

• Building located in U.S.
• Original use begins with taxpayer
• Construction commenced before 1/1/2035

Placed in Service Requirement

The IRS defines “placed in service” as when the property is ready and available for use. It’s not when you purchase the product, but the day the installation is complete, and you are able to use your new product.

Claiming the Credit

IRS Form 5695 is used to claim the Residential Energy Credit. Links to the form and pertinent reference documents are below:

• About Form 5695
• IRS Form 5695 Instructions
• IRS Form 5695
• Manufacturer’s Certification of Geothermal Heat Pump Property Compliance (ClimateMaster)
  

Additional State and Local Geothermal Energy Tax Incentives Available

Check with your your state and local governments! There may be additional incentives for installing a ClimateMaster geothermal heating and cooling system. Visit the DSIRE Website (link below) shown below to find out if there are state and local residential energy tax credits available in your area..

NOTE: Once you reach the DSIRE Website, simply select “Geothermal Heat Pumps” from the “Technology” drop down menu and then click on your state to view all the programs or energy credits available for geothermal heat pumps in your state.