New and Expanded Ground-Source Heat Pump Tax Credits

Charles R. Goulding and Jacob Goldman

The Inflation Reduction Act (IRA) greatly expanded the tax benefits for ground source heat pumps (GSHP) for both commercial taxpayers and for system designers effective January 1, 2023.

GSHP tax credits increased from 10% to a potential 50% tax credit and the EPAct Section 179D designer tax incentives for government buildings and nonprofits increases from $1.80 /s.f. to a potential $5.00 /s.f., for projects completed after January 1, 2023.

AE credits by industry (ETSI)

GSHP is one of the few energy efficiency measures that can qualify for both the $5.00 /s.f. tax incentive and the 50% tax credit. Since the inception of EPAct 179D for in 2006, government building designers have always been eligible for tax incentives.

Now, designers, including geo-specialists, HVAC design and build contractors, engineers, and architects can also earn 179D tax benefits for nonprofit projects. Including nonprofit hospitals, nonprofit universities and schools, museums, houses of worship and a myriad of other nonprofits now qualify.

The primary thing to note is that a designer is the person who creates the technical specifications, not a person that installs, repairs or maintains the property. Tax incentives also are available for the primary designer of:

• Government buildings (including, federal offices, military bases, courthouses, post offices, labs; state offices and universities, transportation facilities, courthouses; and, county/local offices, K-12 public schools, town halls, police and fire departments, libraries, and municipal parking garages)

• Tribal governments¹ (including shopping plazas, hotels, offices, casinos, etc.)

Transferability

For the first time, the up to 50% GSHP tax credits can be transferred to another taxpayer. Taxpayers with small tax liabilities will be able to sell their tax credits to taxpayers with larger tax appetites. For example, REIT’s will be able to sell their credits to help subsidize the installation of these alternative energy technologies.

Direct Benefit

State and local government buildings and nonprofits are eligible for the same tax credit amounts, in cash, from the federal government. Historically, these non-taxpaying entities would require the creation of entities with tax equity partners and then would need to purchase the alternatively generated energy through a power purchase agreement in order for a party to capture the tax credit. Now, these non-taxpaying entities will receive a direct payment of the tax credit amount from the Federal government.

Tax Planning

GSHP service providers should develop a tax planning strategy. The potential EPAct benefits are so large that geothermal project design specialists without the tax capacity to utilize all the incentives should consider taking a team approach and share the tax incentives with other design team members that have the tax capacity.

Although we most commonly work on two party designer splits, we have processed up to six party designer splits. The key is not to waste the excess tax incentives.

Ground-Source Heat Pump

There exists some confusion on when GSHP projects start to qualify for the 6% base alternative energy credit. Section 13102 of the IRA has the following subsections:

• Subsection (d)(2) of IRA defines that in 2022, the ground source heat pump tax credit is 6%

• Subsection (q)(2) and subsection (b) defines that in 2023 through 2032, the ground source heat pump tax credit is also 6%

• Subsection (d)(2) and subsection (b) defines that in 2033, the ground source heat pump tax credit is 5.2%

• Subsection (d)(2) and subsection (b) defines that in 2034, the ground source heat pump tax credit is 4.4%

The items above define the “base credit” and then section (k) creates the 5x bonus. This goes into effect in 2022 as defined by subsection (q)(1) since subsection (k) is not listed in subsection (q)(2). This means that bonus credits go like this:

• 2022 6% x 5 = 30%

• 2023 though 2032 6% x 5 = 30%

• 2033 5.2% x 5 = 26%

• 2034 4.4% x 5 = 22%

Please note the Domestic Content Bonus Credit and the Energy Community Bonus Credit are only available for projects placed in service in 2023 or later.

To qualify for the ground source heat pump (6% base credit), construction must begin prior to January 1, 2035. Qualified equipment (upstream of the heat pump) includes bore field and heat pump. As defined in Section 48(a)(3)(A)(vii):

Increased EPAct benefits [Source: ETSI]

Equipment which uses the ground or ground water as a thermal energy source to heat a structure or as a thermal energy sink to cool a structure, but only with respect to property the construction of which begins before January 1, 2035.

In addition, downstream equipment may qualify as well for the 6% base credit. According to tax interpretation derived from §1.48-9(c)(10)(iv), at least 75% energy used by equipment must be from ground source. If not, equipment does not qualify as ground source heat pump property.

This may include downstream (after heat pump) items such as pipes, ductwork, heat exchangers, and diffusers. Items that do not use ground source energy do not qualify.

Conclusion

GSHP projects are eligible for both tax credits and EPAct 179D energy tax incentives. Specifically, the new and expanded commercial GSHP tax credits and other energy tax incentives should give the green industry fuel to further innovate, grow, and thrive.

Jacob Goldman is the vice president of Energy Tax Savers, Inc. based in Syosset, NY. Charles Goulding is an attorney, CPA and President of Energy Tax Savers, Inc.