The Energy Tax Aspects of Geothermal Heat Pumps


The U.S. Environmental Protection Agency considers geothermal heat pumps the most energy-efficient, environmentally clean and cost-effective HVAC systems available. Leading companies like Google, SAP and Halliburton place the U.S. among the top countries using this very desirable technology. When it comes to alternative energy the big three are solar, wind and geothermal; however, geothermal has an advantage in that it provides consistent uninterrupted energy savings and is not dependent on weather conditions, such as the sun shining or the wind blowing. Because of the rare combination of tax deductions, credits and rebates uniquely available to geothermal heat pump users through 2013, coupled with extraordinary energy cost savings, many companies are now implementing geothermal heat pump projects.

The EPAct Tax Deduction

Pursuant to Energy Policy Act (EPAct) Section 179D, building owners or tenants making qualifying energy-reducing investments can obtain immediate tax deductions of up to $1.80 per square foot.

If the building project doesn't qualify for the maximum $1.80 per square foot immediate tax deduction, there are tax deductions of up to $0.60 per square foot for each of the three major building subsystems: lighting, HVAC (heating, ventilating, and air conditioning), and the building envelope. The building envelope is every item on the building’s exterior perimeter that touches the outside world including roof, walls, insulation, doors, windows and foundation.

The Geothermal Tax Credit

Pursuant to Internal Revenue Code Section 48, companies or individuals installing geothermal heat pumps can take a 10% tax credit for the total cost and installation. This credit is unique in that it can be used in combination with the 179D EPAct tax deduction. In addition, sections 1104 and 1603 of the American Recovery & Reinvestment Act of 2009 allow for the taxpayer to take the 10% tax credit as a cash grant.

What is Geothermal?

Geothermal heat pumps are heating and cooling systems that pump heat to or from the ground. This design takes advantage of the moderate temperatures found just under the surface of the earth in order to boost efficiency and reduce the operational costs of heating and cooling systems. There are two basic designs of geothermal heat pumps: closed-loop, which takes the form of horizontal, vertical, or pond/lake design, and open-loop.

Closed-Loop Geothermal Heat Pumps

A closed-loop system connects a primary refrigerant loop with a secondary water loop buried underground within an appliance cabinet in order to exchange heat. As geothermal technology has improved over the last two decades, it has become increasingly easy to install a closed-loop system anywhere in the country, regardless of terrain or a building's proximity to water or a fault line.

Open-Loop Geothermal Heat Pumps

An open loop system uses well or surface body water as the heat exchange fluid that circulates directly through the system. However, by virtue of the need for an adequate supply of relatively clean water, open-loop systems become advantageous only in those areas with access to a sizable body of water.
The up-front installation costs of a geothermal heat pump vary widely depending upon the size of the property, use, geology of the surrounding land, hydrology, and land availability, and can only be determined on a case-by-case basis.

However, regardless of the expense involved in the initial installation, opportunities to save money on energy abound immediately after installation. Based on recent prices, ground-source heat pumps currently have lower operational costs than any other conventional heating source almost everywhere in the world. In general, a property owner may save anywhere from 30% to 60% annually on utilities by switching from an ordinary system to a ground-source system; depending on factors such as climate, soil conditions, the system features, and prevailing energy rates.

Over the next 40 years the total output capacity of geothermal heat pumps in the U.S. is expected to grow almost exponentially. According to the National Renewable Energy Laboratory, 7,385 MWt of geothermal capacity was available in the U.S. in 2006. They expect that number to grow to 18,400 MWt in 2015, 66,400 MWt in 2025 and over 1,000,000 MWt by 2050 . With the technology available and geothermal capacity expected to more than double by 2015, property owners should take advantage of this technology before the current 2013 EPAct expiration date.

Geothermal Heat Pumps & HVAC EPAct

An HVAC retrofit that reduces total building energy use by 16.67% allows the building to qualify for the 60 cent per square foot EPAct HVAC deduction . Given the extraordinary efficiency of geothermal heat pumps, a retrofit by means of geothermal will most likely qualify for the immediate 60 cent per square foot HVAC deduction, and can potentially reduce energy use enough to trigger $1.20 to $1.80 per square foot EPAct tax deductions on its own. The following chart illustrates the potential tax savings, including EPAct, the geothermal tax credit and MACRS building depreciation, for installation of a geothermal heat pump HVAC system:

Open Table

1. Tax savings based on a 40% income tax rate.
2. Standard tax depreciation schedule.

To obtain the $0.60 to $1.80 per square foot EPAct deduction the required energy cost reduction must be documented by an IRS approved energy simulation model. The ever popular USGBC LEED certification program also requires building energy modeling. Moreover, recognizing the increasing importance of building energy efficiency measures the recently revamped LEED system places much more emphasis on granting LEED qualifying points for energy efficiency measures. The only way to accurately right size HVAC to the building envelope and other building systems is to model the building. As a result of improvements in CAD systems and modeling interfaces, along with the huge increase in professionally trained energy modelers, soon every new building will be modeled as matter of course.

Free-Riding Existing Geothermal HVAC System EPAct Tax Deductions

If a building has already achieved the required energy cost reduction from installation of an HVAC system, like a geothermal heat pump, but has not yet taken its EPAct tax deduction; any further energy-reducing HVAC equipment installation will platform EPAct HVAC tax deductions. Accordingly, any building that already has very efficient HVAC, such as a geothermal heat pump, and has not already taken the EPAct tax deduction, should give strong consideration to further HVAC upgrades on or before December 31st 2013. One common EPAct tax deduction free riding project is to upgrade building controls. For instance, if the owner of a 500,000 square foot building installed a geothermal heat pump prior to 2006 that resulted in a large energy cost reduction, but could not take an EPAct deduction because the law had not yet been signed into effect, they could then realize up to the full $900,000 EPAct tax deduction upon upgrading HVAC building controls before December 31st 2013.

Combining Geothermal with Lighting Retrofits

Since geothermal heat pump installation can generate large energy savings on its own, combining the upgrade with a lighting retrofit can easily achieve the maximum $1.80 per square foot deduction. Installing highly efficient lighting such as LEDs or T-5 and T-8 fluorescents will not only help to increase the total EPAct deduction, but are in adherence with the recent manufacturing bans on T-12 fluorescents and probe state metal halide lighting.


Across the nation there are many utilities that offer rebates for the installation of geothermal heat pumps. Currently, utilities in over 20 states are offering rebates for geothermal heat pump installation, ranging from a few hundred to a few hundred thousand dollars. When advising on whether or not to install a geothermal heat pump, a smart tax planning decision should always factor in utility rebates. The following chart illustrates the tax incentives for geothermal installation including a sample 20% local utility rebate:

Open Table

1. Tax savings based on a 40% income tax rate.
2. Standard tax depreciation schedule.

The Geothermal/Ground Source Heat Pump Associations

One way to follow geothermal developments is becoming part of the Geothermal Energy Association (GEA) or the International Ground Source Heat Pump Association (IGSHPA). According to its website, the GEA is a trade association composed of companies that support the expanded use of geothermal energy and the development of geothermal resources worldwide for electrical power generation and direct-heat uses . A member of the GEA receives weekly updates and news about geothermal energy and the geothermal community, and receives discounted marketing prices on a leading renewable energy website. The IGSHPA is a similar organization whose stated goal is to promote and advance the use of ground source heat pump technology .


Geothermal heat pumps present the opportunity to realize the rare nexus between tax deductions, tax credits, tax rebates, and a significant reduction in energy costs. Although the investment costs for these systems are high, the combination of energy savings and tax savings can produce a very favorable economic payback. As the geothermal heat pump market expands, more property owners and HVAC systems designers are getting very comfortable with this technology. When considering a geothermal heat pump investment, the project team should focus on maximizing the savings that are available through, utility and state rebates, the federal tax credit and EPAct.

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