HVAC Residential Market / Geothermal Heat Pumps

Geothermal Tax Credits Still Helping

July 18, 2011
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Good news: The customers of HVAC contractors like those in this article, who install qualifying sustainable energy systems (geothermal heat pumps, solar water heaters, solar panels, wind energy systems, and fuel cells), will continue to receive tax credits through Dec. 31, 2016. These can total 30 percent of the installed costs (product and installation) of the systems.

The American Recovery and Reinvestment Act (ARRA) of 2009 provided an expanded tax credit to homeowners who made their homes more energy efficient in 2009 and 2010, helping them recoup 30 percent (up to $1,500) of the installed costs of numerous projects. At the end of 2010, Congress approved the credits for another year, but at the reduced, prestimulus bill levels of 10 percent of the installed costs, with a maximum credit for all qualified retrofits of $500.

However, the 30 percent uncapped tax credit for the installation of geothermal and other sustainable energy systems, that was also part of ARRA, remains intact. This is good news for contractors like these, who have watched their sales of geothermal systems increase as a result of the federal tax incentive.

CONTRACTOR STORIES

Tony LaFrenier, owner of Precision Air, Inc., Nashville, Tenn., is among them. LaFrenier added geothermal design service and installation to his HVAC business 13 years ago - four years after the business opened.

“We began working with WaterFurnace International, performing geothermal installations long before there were any incentive dollars on the local or federal level,” he recalled. “And there was very little information about geothermal available to consumers, especially in this market.”

The first decade was “a huge educational process for us, which extended the length of the sales process,” LaFrenier said. “Today, consumers are much more knowledgeable when they come to us, thanks in large part to the Internet, so it is easier for us to sell a geothermal system.”

Geothermal installations now comprise about 51 percent of Precision Air’s business. “Consumer knowledge, along with rising energy costs, the whole green initiative, and incentives available from local utilities as well as the government account for the rapid growth of this portion of our business,” LaFrenier said.

“I would say that seven out of 10 of our potential geothermal clients would buy geothermal regardless of the tax credit but the remaining 25-30 percent need that tax credit to push them over the edge. Don’t get me wrong - those seven clients are already sold on geothermal, are thrilled to receive the tax credit, so it has definitely had a positive impact on our business.”

Andrew Wolfe, vice president of Arronco Comfort Air, Inc., Burlington, Ky., agreed. “I would estimate that our geothermal sales have increased by as much as 25 percent as a result of the federal tax credit,” he said.

Serving the greater Cincinnati/Lexington, Ky., area, the contractor installed its first geothermal system in 1986. Today it accounts for 60 percent of this company’s business, divided between new construction (40 percent) and retro- fits (60 percent).

“We’re going into existing homes, where equipment is at least 15 years old, and upgrading the HVAC system to a geothermal system,” said Wolfe. “Our clients are seeing a 20-30 percent return on their investment, thanks to the federal tax credit, which is a huge incentive for them. At the same time, they receive a better warranty, a more comfortable environment, and a system that boasts twice the life-span of an air-source air conditioner/heat pump system without the outdoor unit.”

Like LaFrenier, Wolfe attributes at least 25 percent of his geothermal sales to the federal tax incentive. “For many of our customers who have decided to go geothermal, the tax credit is a nice bonus,” he explained. “But for a good 25 percent of them, the tax credit is what puts them over the edge and causes them to choose a geothermal system.”

Wolfe said most of his clients are well versed in the benefits of geothermal, thanks in part to his company’s TV, radio, Internet, home show, and direct mail marketing. In fact, their most frequently asked question is not about geothermal energy, but about the tax credit. “They’re confused by the difference between a tax deduction and a tax credit,” LaFrenier said. A tax deduction reduces how much you owe in taxes, by decreasing your income. A tax credit is a dollar-for-dollar reduction in the amount of tax you owe. Although tax credits are the same for everyone, tax deductions are not.

“When I explain that this is a dollar-for-dollar tax credit, they first think it’s too good to be true,” said Wolfe. “Then they get really excited.”

EDUCATION

Other questions frequently posed by customers to both contractors deal with rental properties and vacation homes.

“I have to tell them that they need to occupy the home in order to qualify for the credit,” said LaFrenier. “That means an installation in a rental property does not qualify, but an installation in a vacation home does. The other thing they need to understand regards a refund check. If a customer has a credit greater than the amount they owe the government, they will not get a refund check from the government for the difference.”

Both LaFrenier and Wolfe feel their company websites do a good job educating potential customers about tax incentives. To keep themselves abreast of the variety of incentives available to their customers, they attend conferences, stay in touch with the local utility, and gather information from their equipment manufacturer.

For both contractors, the extended tax credit for geothermal systems will continue to work to their advantage. “The tax credit has been a very good sales tool for us, because it brings the cost of a geothermal system down by 30 percent and considerably shortens the return on investment,” said Wolfe.

“And it adds to the appeal of the geothermal story,” said LaFrenier. “People identify more with geothermal than some of the other renewables, because it’s not that different from a conventional heating and cooling system. It uses just about every component that a conventional system uses, so you can break the system down fairly easily to most consumers and baby step them through the subtle differences between a conventional and geothermal system. But those subtle differences make a huge impact.”

By applying the tax credit, “we can reduce the payback for all those benefits from eight, nine, or 10 years, to just four or five years,” he said.

“It’s no wonder that for the first seven to nine years we sold geothermal, we were pushing the snowball uphill. Now, with the benefits the system offers, the knowledge consumers have of those benefits, and the added tax incentive, the snowball has crested the hill and is going down the other side, rapidly picking up momentum. It’s an exciting time to be selling geothermal.”

For more information, visit www.arronco.com/index.htm, www.precisionairtn.com, or www.waterfurnace.com.

Publication date: 07/18/2011

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