New Tax Incentives for Geothermal Systems

Connecticut Wells has some great news regarding incentives to install geothermal systems in homes and commercial buildings.

The Emergency Economic Stabilization Act of 2008, H.R. 1424, which became law on October 3rd, contains long-term tax incentives to encourage the use of renewable energy technologies in homes and businesses. The bill includes geothermal heat pumps in these incentives. The bill also extends existing tax incentives for homes and commercial buildings that support the installation of highly-efficient heating, cooling, and water heating systems, such as geothermal heat pumps.

By classifying geothermal heat pumps under federal renewable energy provisions with solar and wind, Congress has recognized the crucial role this 50-state technology can play in reshaping our energy future.

The specific provisions of the bill that directly or indirectly support geothermal heat pumps are:

• Long-term Extension of Energy Credit: The bill provides a new 10% investment tax credit for combined heat and power systems and geothermal heat pumps. The bill extends these credits through 2016.
• The bill adds residential geothermal heat pumps, capped at $2,000, as qualifying property. The bill extends these credits through 2016 and allows them to be used to offset the AMT.
• Extension of Energy-Efficient Buildings Deduction. Current law allows taxpayers to deduct the cost of energy-efficient property installed in commercial buildings. The amount deductible is up to $1.80 per square foot of building floor area for buildings achieving a 50% energy savings target. The energy savings must be accomplished through energy and power cost reductions for the building’s heating, cooling, ventilation, hot water, and interior lighting systems. This bill extends the energy efficient commercial buildings deduction for five years, through December 31, 2013.
• Extension of Credit for Energy-Efficiency Improvements to New Homes. Undercurrent law, contractors receive a credit for the construction of energy-efficient new homes that achieve a 30% or 50% reduction in heating and cooling energy consumption relative to a comparable dwelling. The credit equals $1,000 for homes meeting a 30% efficiency standard, $2,000 for homes meeting a 50% standard. The bill extends the new energy efficient home tax credit through 2009.

Details

Code Sec. 25D. Residential energy efficient property.
(a) Allowance of credit.
In the case of an individual, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the sum of—

(1) 30 percent of the qualified solar electric property expenditures made by the taxpayer during such year,

(2) 30 percent of the qualified solar water heating property expenditures made by the taxpayer during such year, 1

(3) 30 percent of the qualified fuel cell property expenditures made by the taxpayer during such year 2 , 3 4

(4) 30 percent of the qualified small wind energy property expenditures made by the taxpayer during such year
5 , and 6

(5) 30 percent of the qualified geothermal heat pump property expenditures made by the tax payer during such year.

(b) Limitations.

(1) Maximum credit.

The credit allowed under subsection (a) (determined without regard to subsection (c) ) for any taxable year shall not exceed— 7

• (A) $2,000 with respect to any qualified solar water heating property expenditures, 9
•  (B) $500 with respect to each half kilowatt of capacity of qualified fuel cell property (as defined in section 48(c)(1)) for which qualified fuel cell property expenditures are made 10 , 11
• (C) $500 with respect to each half kilowatt of capacity (not to exceed $4,000) of wind turbines for which qualified small wind energy property expenditures are made 13 , and
• (D) $2,000 with respect to any qualified geothermal heat pump property expenditures.

(2) Certification of solar water heating property.

No credit shall be allowed under this section for an item of property described in subsection (d)(1) unless such property is certified for performance by the non-profit Solar Rating Certification Corporation or a comparable entity endorsed by the government of the State in which such property is installed.
(c) Limitation based on amount of tax; carryforward of unused credit

• (1) Limitation based on amount of tax.In the case of a taxable year to which section 26(a)(2) does not apply, the credit allowed under subsection (a) for the taxable year shall not exceed the excess of—
  • (A) the sum of the regular tax liability (as defined in section 26(b)) plus the tax imposed by section 55, over
  • (B) the sum of the credits allowable under this subpart (other than this section) and section 27 for the taxable year.
• (2) Carryforward of unused credit.
  • (A) Rule for years in which all personal credits allowed against regular and alternative minimum tax. In the case of a taxable year to which section 26(a)(2) applies, if the credit allowable under subsection (a) exceeds the limitation imposed by section 26(a)(2) for such taxable year reduced by the sum of the credits allowable under this subpart (other than this section), such excess shall be carried to the succeeding taxable year and added to the credit allowable under subsection (a) for such succeeding taxable year.
  • (B) Rule for other years. In the case of a taxable year to which section 26(a)(2) does not apply, if the credit allowable under subsection (a) exceeds the limitation imposed by paragraph (1) for such taxable year, such excess shall be carried to the succeeding taxable year and added to the credit allowable under subsection (a) for such succeeding taxable year.

(d) Definitions.
For purposes of this section—

• (1) Qualified solar water heating property expenditure.
  The term “qualified solar water heating property expenditure” means an expenditure for property to heat water for use in a dwelling unit located in the United States and used as a residence by the taxpayer if at least half of the energy used by such property for such purpose is derived from the sun.
• (2) Qualified solar electric property expenditure.
  The term “qualified solar electric property expenditure” means an expenditure for property which uses solar energy to generate electricity for use in a dwelling unit located in the United States and used as a residence by the taxpayer.
• (3) Qualified fuel cell property expenditure.
  The term “qualified fuel cell property expenditure” means an expenditure for qualified fuel cell property (as defined in section 48(c)(1)) installed on or in connection with a dwelling unit located in the United States and used as a principal residence (within the meaning of section 121) by the taxpayer.
• (4) Qualified small wind energy property expenditure.
  The term “qualified small wind energy property expenditure” means an expenditure or property which uses a wind turbine to generate electricity for use in connection with a dwelling unit located in the United States and used as a residence by the taxpayer.
• (5) Qualified geothermal heat pump property expenditure.
  • (A) IN GENERAL. The term “qualified geothermal heat pump property expenditure” means an expenditure for qualified geothermal heat pump property installed on or in connection with a dwelling unit located in the United States and used as a residence by the taxpayer.
  • (B) Qualified geothermal heat pump property. The term “qualified geothermal heat pump property” means any equipment which—
    (i) uses the ground or ground water as a thermal energy source to heat the dwelling unit referred to in subparagraph (A) or as a thermal energy sink to cool such dwelling unit, and
    (ii) meets the requirements of the Energy Star program which are in effect at the time that the expenditure for such equipment is made.

e) Special rules.
For purposes of this section—

• (1) Labor costs.
  Expenditures for labor costs properly allocable to the onsite preparation, assembly, or original installation of the property described in subsection (d) and for piping or wiring to interconnect such property to the dwelling unit shall be taken into account for purposes of this section.
• (2) Solar panels.
  No expenditure relating to a solar panel or other property installed as a roof (or portion thereof) shall fail to be treated as property described in paragraph (1) or (2) of subsection (d) solely because it constitutes a structural component of the structure on which it is installed.
• (3) Swimming pools, etc., used as storage medium.
  Expenditures which are properly allocable to a swimming pool, hot tub, or any other energy storage medium which has a function other than the function of such storage shall not be taken into account for purposes of this section.
• (4) Dollar amounts in case of joint occupancy.
  In the case of any dwelling unit which is jointly occupied and used during any calendar year as a residence by 2 or more individuals the following rules shall apply:
  • (A) Maximum expenditures. The maximum amount of expenditures which may be taken into account under subsection (a) by all such individuals with respect to such dwelling unit during such calendar year shall be— 18 , 19
    (i) $6,667 in the case of any qualified solar water heating property expenditures, 20
    (ii) $1,667 in the case of each half kilowatt of capacity of qualified fuel cell property (as defined in section 48(c)(1)) for which qualified fuel cell property expenditures are made 21 , 22
    (iii) $1,667 in the case of each half kilowatt of capacity (not to exceed $13,333) of wind turbines for which qualified small wind energy property expenditures are made 24 , and
    (iv) $6,667 in the case of any qualified geothermal heat pump property expenditures.
  • (B) Allocation of expenditures. The expenditures allocated to any individual for the taxable year in which such calendar year ends shall be an amount equal to the lesser of—
    (i) the amount of expenditures made by such individual with respect to such dwelling during such calendar year, or
    (ii) the maximum amount of such expenditures set forth in subparagraph (A) multiplied by a fraction—
    (I) the numerator of which is the amount of such expenditures with respect to such dwelling made by such individual during such calendar year, and
    (II) the denominator of which is the total expenditures made by all such individuals with respect to such dwelling during such calendar year.
  • (C) Subparagraphs (A) and (B) shall be applied separately with respect to expenditures described in paragraphs (1), (2) , and (3) of subsection (d).(5) Tenant–stockholder in cooperative housing corporation.
    In the case of an individual who is a tenant-stockholder (as defined in section 216) in a cooperative housing corporation (as defined in such section), such individual shall be treated as having made his tenant-stockholder’s proportionate share (as defined in section 216(b)(3)) of any expenditures of such corporation.

    (6) Condominiums.
    (A) In general. In the case of an individual who is a member of a condominium management association with respect to a condominium which the individual owns, such individual shall be treated as having made the individual’s proportionate share of any expenditures of such association.
    (B) Condominium management association. For purposes of this paragraph , the term “condominium management association” means an organization which meets the requirements of paragraph (1) of section 528(c) (other than subparagraph (E) thereof) with respect to a condominium project substantially all of the units of which are used as residences.

    (7) Allocation in certain cases.
    If less than 80 percent of the use of an item is for nonbusiness purposes, only that portion of the expenditures for such item which is properly allocable to use for nonbusiness purposes shall be taken into account.

    (8) When expenditure made; amount of expenditure.
    (A) In general. Except as provided in subparagraph (B) , an expenditure with respect to an item shall be treated as made when the original installation of the item is completed.

  • (B) Expenditures part of building construction. In the case of an expenditure in connection with the construction or reconstruction of a structure, such expenditure shall be treated as made when the original use of the constructed or reconstructed structure by the taxpayer begins.
    (9) Property financed by subsidized energy financing.
    For purposes of determining the amount of expenditures made by any individual with respect to any dwelling unit, there shall not be taken into account expenditures which are made from subsidized energy financing (as defined in section 48(a)(4)(C)).
    (f) Basis adjustments.
    For purposes of this subtitle, if a credit is allowed under this section for any expenditure with respect to any property, the increase in the basis of such property which would (but for this subsection) result from such expenditure shall be reduced by the amount of the credit so allowed.
    (g) Termination.
    The credit allowed under this section shall not apply to property placed in service after 26 December 31, 2016.
    Effective Date: (Sec. 106(f)(1) Div B, HR1424, 10/3/2008) effective for tax. yrs. begin. after 12/31/2007.