The time to consider geothermal energy tax credits is now
- Existing energy tax credits can range from 6% to 60% (typically 30% to 40%) on geothermal heating, cooling or power systems, making these systems far more affordable than you might think.
- While other clean energy tax credits and incentives were phased out by the OBBB, geothermal credits remained almost entirely intact.
- Geothermal systems are broadly reliable, can benefit both commercial and residential projects and are considerably cheaper than their traditional counterparts once you factor in tax incentives and operating costs.
You may have assumed that geothermal heating and cooling systems are too expensive to be a viable clean energy option. But by applying for the right tax credits, geothermal heating, cooling or other renewable energy projects can become significantly more profitable.
Plus, the environmental benefits of geothermal can be dramatic. Drawing on naturally occurring steam and hot water beneath the earth’s surface, geothermal systems use this renewable energy to produce electric power or heat, creating about 75% less carbon dioxide emissions than oil or gas.
Keep reading to learn more about how you can use tax credits to dramatically reduce the cost of geothermal energy systems
Geothermal energy tax credits make projects dramatically more profitable
Businesses or organizations curious about installing geothermal heating, cooling or electric systems can look to the tax code to make those projects dramatically more profitable. Even after the One Big Beautiful Bill Act (OBBB) began phasing out clean energy tax incentives for wind and solar projects, geothermal tax benefits have stayed intact, continuing to offer an eye-popping credit of up to 60%, which includes a 6% to 30% base plus adders.
From an energy tax incentive perspective, geothermal is the best game in town:
- Under rules included in the Inflation Reduction Act of 2022 (IRA), federal tax credits for residential geothermal system installations can range from 6% to 60%, with the typical project receiving 30%-40%. This runs through 2032 and then gradually reduces until expiring in 2034. Today’s credits are far more valuable than the initial energy investment tax credits that included geothermal, which were first made available in 2008.
- Ground source heat pump commercial construction projects with systems under 1 megawatt in size are similarly eligible to receive the full 30% base tax credit (which can reach 60% with adders).
- Projects over 1 megawatt in size that begin no later than January 1, 2035, will receive a base tax credit of 6%. However, these projects can still qualify for the full 30% tax credit (60% with adders) if certain labor standards are met, including apprenticeship requirements and an assurance that all laborers and mechanics involved in the construction or maintenance of a project for five years after its completion are paid prevailing wages or greater, as required under the law.
The three adders that are available include 10% for being located in a designated low-income community, 10% for being in an energy community and 10% for meeting domestic content requirements.
The federal credit is applied for the tax year you place the system in service, so the sooner you get started, the sooner you will reap the benefit. It’s also wise to explore any state or local credits, rebates, low-interest loans or other green energy incentives available for your project.
How do geothermal tax incentives benefit nonprofits?
Nonprofits and other nontaxable entities can also benefit by monetizing tax credits they receive when installing geothermal systems. These organizations can elect to be treated as having made a tax payment equal to the value of the tax credit they would otherwise be eligible to claim, which effectively makes this tax credit refundable through direct pay.
The IRA also allows eligible taxpayers to transfer or sell all or a portion of their eligible tax credits to an unrelated taxpayer. The buyer of the credit can offset their income tax with this credit. The IRA extends the carryback period to utilize credits up to three years, and any remaining credits can be carried forward.
However, tax-exempt entities that install geothermal systems that are not domestically made should be aware that they will face a tax penalty equal to 10% of any credits they claim. While most geothermal systems are produced domestically, organizations should still work with their contractor and tax advisor to avoid any surprises here.
What are the essential geothermal tax credits you should know?
Geothermal energy projects can benefit from two major tax credits. These include the Section 48 Investment Tax Credit (ITC) and the Section 45Y Clean Electricity Product Tax Credit (PTC).
| Tax credit | Direct pay from the U.S. government | Optional credit transfer incentive | |
|---|---|---|---|
|
Direct pay eligibility is limited to state/local governments, tribes, rural electric coops and nonprofits. |
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Source: The Real Estate Roundtable
Besides available tax rebates, why else should you consider geothermal?
Here are some other key advantages that can make geothermal a desirable option in new construction:
- Highly energy efficient: On average a geothermal system can reduce heating and cooling energy use by 30-70% compared to a traditional system.
- Always available: Like other renewables, the supply is unlimited, but unlike wind and solar, geothermal is not dependent on daylight or affected by weather conditions.
- More reliable than conventional systems: Geothermal features fewer mechanical systems that can fail or need replacement. The pump that pushes coolant fluid through the pipes is the only component that needs maintenance.
- Space saving: Compared to large wind turbines and solar panels, geothermal systems are far more compact. Because pipes are buried in the ground with few above-ground components, much less is required inside a building in terms of mechanical systems.
- Runs silently: There are no mechanical noises such as those in boiler and furnace systems.
- Broadly useful: Geothermal power systems can be installed in almost any type of building: from manufacturing facilities and warehouses to shopping malls, public buildings and multifamily structures for cooling and heating.
Geothermal systems do typically need to draw some energy from the grid in order to operate. However, pairing geothermal with solar panels or other clean energy sources can help get carbon emissions closer to net zero.
What are the construction and installation costs for geothermal systems?
Factoring in tax credits, geothermal energy or HVAC systems can be surprisingly cost-effective. Here’s are some rough cost estimates for construction and installation costs for geothermal HVAC:
- Geothermal system cost per square foot: $8-$19
- Average cost: $13.50 per square foot
- Construction costs: $6 million for 40,000 square feet
- Install price for geothermal system: $540,000
While geothermal systems cost roughly 40% more at the start than conventional HVAC systems, they have a faster payback period than traditional heating and cooling systems through lower energy bills, plus the cost-reduction benefits of the tax credit, which would amount to about $162,000.
Is geothermal cheaper than traditional energy in the long run?
While the upfront costs may be higher, geothermal is dramatically cheaper than fossil fuel once actively in use. Here’s an example of the estimated cost savings between geothermal and a traditional system for a 40,000 square-foot apartment building:
- 10,000 gallons of fossil fuels: $30,000
- 65,000 kilowatt-hours of electricity: $10,000
- This translates to a 67% savings for geothermal users.
Ongoing maintenance requirements and costs with a geothermal heat pump system — as opposed to maintaining a boiler or furnace and an air conditioning system — are also dramatically lower. With fewer mechanisms in a geothermal system, parts don’t wear out or need regular cleaning or replacement.
How Wipfli can help
We help businesses and organizations claim valuable tax credits to make projects more profitable. Let’s talk about your goals and how the right tax incentives can help you achieve them. Start a conversation.
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