The Inflation Reduction Act (IRA) of 2022 offers energy-saving federal tax incentives for commercial projects utilizing geothermal water source heat pumps. The IRA contains federal funding for clean energy projects, with the goal of lowering the nation’s carbon emissions
Who’s Eligible
Equipment that uses the ground or ground water as an energy source for heating and cooling a building is eligible for the commercial geothermal tax credit. The system must be in the United States and only its owner can claim tax credits or depreciation deductions.1 After equipment is installed, the taxpayer must take legal title of the equipment and have all necessary licenses and permits needed for its operation. Starting in 2023, section 6418 allows for commercial taxpayers to transfer the credit to other taxpayers.
1. For the EPAct 179D tax deduction, the commercial building owner can take the deduction and for not for profit, government, or tribal government buildings, the designer can take the deduction. 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.
How to Claim the Federal Commercial Geothermal Tax Credit
Use IRS Form 3468 to claim the ITC. The commercial geothermal tax credit can be used to offset both regular income taxes and individual alternative minimum taxes (AMT). If the tax credit exceeds the income tax liability, the loss can be carried back one taxable year and the remaining balance can be carried into future years. Use IRS Form 4562 to claim the 5-year and the one-time bonus depreciation. Commercial building owners can take the 179D for building projects completed since Jan 1, 2006. A standard form for 179D will be available within IRS Form 7205. To claim a 179D deduction, use the “Other” deduction line. IRS Form 3115 is used for catch-up on all prior year unclaimed EPAct 179D deductions. Designers of government projects must amend prior year returns and can only adjust the prior 3-years.