The Energy Improvement and Extension Act of 2008 (HR 1424) provided the shot in the arm the geothermal segment of the HVAC industry needed in order to expand and grow. HR 1424 offers a one-time tax credit of 30 percent of the total investment for homeowners who install residential ground-loop or ground-water geothermal heat pumps, and a tax credit of 10 percent of the total investment is also available, with no maximum, for commercial system installations.
The residential portion of the tax credit presents a larger percentage of credit and would seem more valuable, but, for many contractors, the commercial portion of the credit provides a distinct advantage when selling the technology.
In addition to geothermal installations, the tax credit — commonly referred to as 25D — offers consumers up to 30 percent on the installation of wind power, solar electric and water, and fuel cell technologies.
“The high value of the credit certainly helps taxpayers justify these types of investments,” said Charlie McCrudden, senior vice president of government relations, ACCA. “In 2008, Congress reauthorized the 25D tax credit for eight years, which is quite a long time in terms of tax policy.”
The Odds of Another Extension
The eight-year reauthorization of the credit is set to expire Dec. 31, 2016, but many throughout the industry are optimistic it will be extended. “We [the Geothermal Exchange Organization] have lobbied Congress to extend the federal tax credit to 2020,” said Doug Dougherty, president and CEO, Geothermal Exchange Organization (GEO). “We are close to putting together comments for the new finance committee in the U.S. Senate and the House of Representatives’ Ways and Means Committee. Geothermal is a mature technology, yet occupies a small market share.”
Congress needs to extend the tax benefits because geothermal offers the best way to reduce energy consumption in commercial buildings, said Dougherty.
“We’re trying to change customer behavior and that takes incentives. Currently, taxes are the biggest incentive in our toolbox,” he said.
“I am optimistic the 25D tax credit will be extended at some point,” said McCrudden. “I can’t say whether that will happen before it expires at the end of 2016 or if it will occur sometime in 2017 and apply retroactively, as we have seen with the 25C residential energy-efficiency tax credit. This is less than ideal, as it’s impossible to market a tax credit by saying ‘it doesn’t exist now but it probably will in the future.’”
McCrudden also noted Congress seemingly prefers to pass short-term, bulk extender bills that include expired or expiring provisions all in one swoop. While this means all credits are treated equally, at the same time, there isn’t much opportunity for modifications.
“Congress will have to address dozens of tax credits that expired at the end of 2014 sometime this year,” said McCrudden. “There’s been some discussion about making some of them permanent as part of a separate debate on comprehensive tax reform. It’s possible that credits like 25C — which is currently expired — and some of those facing expiration in the next two or three years — like 25D — may also be extended early. For this scenario to play out, Congress would have to get its act together and pass something before the fall, when election season politics will take over.”
Commercial Credit Provides Real Benefits
While smaller by number, Jay Egg, certified GeoExchange designer (CGD), Egg Geothermal, Port Richey, Florida, believes the 10 percent commercial credit is more beneficial to consumers than its 30 percent residential counterpart.
“If the customer is a commercial entity, who owns the commercial property, that entity receives a 10 percent federal tax credit,” said Egg. “That doesn’t appear to be favorable until the rest of the story is considered. When the Modified Accelerated Cost Recovery System (MACRS) — which is the current tax depreciation system in the U.S. — is applied, the geothermal HVAC system is depreciated in an accelerated manner from 27 years down to an abbreviated five years. A 50 percent bonus depreciation is also applied to the first year. This 50 percent bonus has been extended and modified several times since 2008 — most recently in January 2013 by the American Taxpayer Relief Act of 2012. By taking advantage of the commercial/corporate geothermal HVAC tax credits and incentives, an expenditure of $1 million for a geothermal HVAC system will net tax incentives amounting to $480,000 over five years under current program guidelines. A 48 percent tax incentive for corporate clients is clearly favorable to the 30 percent tax credit for residential clients.”
Dougherty said the commercial credit is certainly being utilized by consumers. “Most, if not all, who put a geothermal heat pump in a residential home use the credit, and so do those who install commercially,” he said.
“Architects and engineers definitely price that in when doing any economic analysis. We always tell contractors and architects to analyze the 30-year life cycle cost of the system, and it really does start with the architects and the engineers. In regard to the upfront cost, if architects and engineers aren’t building with geothermal in mind, we can’t just come in after a project has started and convert it to a geothermal heat pump. So, we are getting more people understanding it’s in a building owner’s best interest to use geothermal from the start of a project.”
SIDEBAR: USDA Incentive Funds Renewable Energy and Energy-efficiency Projects
The U.S. Department of Agriculture (USDA) announced that rural agricultural producers and small business owners can apply for financial resources to purchase and install renewable energy systems or make energy-efficiency improvements. Applicable technologies include geothermal heating and cooling systems.
USDA is making more than $280 million available to eligible applicants through the Rural Energy for America Program (REAP). The agency is offering grants of up to 25 percent of total project costs and loan guarantees for up to 75 percent of total project costs.
Congress reauthorized the REAP program last year, guaranteeing annual funding of no less than $50 million for the duration of the five-year Farm Bill. Since 2009, USDA has awarded $545 million to more than 8,800 REAP projects nationwide. This includes $361 million in REAP grants and loans for more than 2,900 renewable energy systems.
But, the most sought-after grants are for solar installations, lamented Doug Dougherty, president, Geothermal Exchange Organization (GEO).
“Geothermal heating and cooling installations have only claimed a small percentage of REAP incentive funds available from the USDA. Yet, farm operations of all kinds are ideal candidates for geothermal heating and cooling,” he said. “Along with available tax incentives, the REAP program is a vital initiative that geothermal heat pump distributors, dealers, and installers should pass on to potential customers in the agricultural community.”
Eligible renewable energy projects must incorporate commercially available technology. This includes renewable energy from wind, solar, ocean, small hydropower, hydrogen, geothermal, and renewable biomass — including anaerobic digesters. Energy-efficiency projects may include lighting, heating, cooling, ventilation, fans, automated controls, and insulation upgrades, as long as the project reduces energy consumption.
“There are a lot of potential applications,” said Ed Lohrenz, founder at GEOptimize Inc. “To list a few:
• Cooling milk for a dairy — While producing hot water for washing, space heating, etc., cows produce more milk because they drink more water when it’s warmed;
• Cooling pig barns — pigs tend to eat less when it’s too hot and don’t gain weight as quickly; and
• Cooling produce — even in winter, fruit and vegetables produce heat. Cooling them and using heat in other nearby buildings is a good application.”
Application deadlines vary by project type and the type of assistance requested. Details on how to apply are on page 78029 of the Dec. 29, 2014, Federal Register or are available by contacting state Rural Development offices.
Information courtesy of Geothermal Exchange Organization.
Publication date: 3/23/2015