Here in the northeast, the recent price erosion of natural gas due to hydrofracturing has made it more difficult to sell geothermal by ROI payback analysis alone. It was still a home run against oil comparisons when including the 30% Federal Renewable Energy Tax Credit. In a major blow to the industry, the IRS recently issued “Notice 2013-70 titled “Q&A on Tax Credits for Sections 25C and 25D“. This notice serves to clarify certain parameters and questions regarding the 25C and 25D Renewable Energy Tax Credits. Specifically, the following passages effectively reduce the Section 25D tax credits to a point where geothermal systems cannot be sold by the financial benefits alone using many of the financial formulas currently in use:
Geothermal Heat Pump Property.
Q-31: A taxpayer contacts a seller to inquire about the installation of a geothermal heat
pump to heat his home. The seller/installer informs the taxpayer that the following items
must be installed in addition to the geothermal heat pump: heat exchange equipment in
the ground outside of the house, a distribution system for the home, and a back-up
emergency heating or cooling system. Which of these costs, if any, are eligible for the
§ 25D credit?
A-31: Only the cost of the heat exchange equipment in the ground outside the house
can be eligible for the § 25D credit. The costs for the distribution system for the home
and a back-up emergency heating or cooling system are not eligible for the credit
because they are not incurred for qualified geothermal heat pump property. Section
25D(d)(5)(B) defines qualified geothermal heat pump property as any equipment that (1)
uses the ground or ground water as a thermal energy source to heat the dwelling unit or – 12 –
as a thermal energy sink to cool such dwelling unit, and (2) meets the requirements of
the Energy Star program in effect at the time that the expenditure for such equipment is
made. Section 25D(e)(1) provides that expenditures for piping and wiring to
interconnect qualified property to a dwelling unit are eligible for the § 25D credit.
However, nothing in § 25D extends the credit to other auxiliary equipment such as
distribution systems within the dwelling unit or backup emergency heating and cooling
Rebates generally represent a reduction in the purchase price or
cost of property, and the taxpayer must exclude the amount of the rebate from the
amount of the qualified expenditure on which the taxpayer calculates the tax credit. In
general, in order for a receipt of funds to be considered a nontaxable rebate, the rebate
must be based on or related to the cost of the property; the rebate must be received
from someone having a reasonable nexus to the sale of the property, for example, the
manufacturer, distributor, or seller/installer; and the rebate must not represent payment
or compensation for services.
So, not only is the IRS taking away the ability to take a tax credit on the duct distribution system installed as a necessary part of the majority of geothermal heat pump installations, it appears to also eliminate radiant floor distribution systems as well. Depending upon your interpretation here, only the ground loop, connecting primary loop, geothermal heat pump and electrical wiring for the system actually qualify for the tax credit. To add insult injury, Utility Rebates must also be figured against the tax credit value.
Until now, I don’t know of a residential customer who has not claimed these items via Form 5695. How the IRS plans to enforce this determination and/or clarification moving forward is another story. You can easily foresee inflated ground loop and equipment installation segments with a $1.00 ductwork marketing special from contractors looking to bend the rules or create loopholes. A major and essential component for the operation of any energy efficient system has apparently been eliminated from consideration. Unfortunately, this may be a serious job for the tax lawyers and lobbyists to try to reverse which may have to high a price tag for a burgeoning industry represented by IGSHPA and the Geothermal Exchange Organization. Between these two organizations there is neither the staff nor the PAC fund necessary to mount the political backlash necessary to reverse such a decision. Perhaps if they were to join forces with ACCA, ASHRAE and other industry organizations that are affected, there might be the necessary political clout to quash such a narrow interpretation.