How to claim the residential energy-efficient property credit for geothermal heat pump property.

• Author: Pinneau, Trina

Several provisions in the Code provide tax credits to individual taxpayers who install energy-efficient property in their residences. One such provision, Sec. 25D, allows for an income tax credit for a taxpayers expenditures for residential energy-efficient property. Originally enacted in 2005 as part of the Energy Policy Act of 2005, P.L. 109-58 (Section 1335(a)), the credit has been modified and extended several times since its inception. Before Sec. 25D, no credit existed for these expenditures; however, under Sec. 136, a taxpayer could exclude from income the value of a subsidy a public utility provided to purchase or install energy conservation measures.

The current version of Sec. 25D(a) provides for a credit against a taxpayer's income tax equal to 30% of the expenses incurred for installing certain energy-efficient property in a qualified dwelling unit. The energy-efficient properties eligible for the credit include qualified solar electric property, qualified solar water heating property, qualified fuel cell property, qualified small wind energy property, and qualified geothermal heat pump property. All must be placed in service on or before Dec. 31,2016 (Sec. 25D(g)). Although Treasury has never issued regulations under Sec. 25D, the IRS has released notices, in question-and-answer (Q8cA) format, detailing the procedures and certification processes to use the credit, and the Environmental Protection Agency (EPA) has released rules under the Energy Star program defining the property requirements and specifications. The following aims to cover the myriad rules from all sources and present them in a concise and comprehensive format while focusing specifically on geothermal heat pump property.

A taxpayer can claim the credit for expenses associated with geothermal heat pump property if the property is qualified geothermal heat pump property and the expenses meet the expenditure rules of Sec. 25D(d)(5). If the taxpayer meets these requirements, he or she must also comply with the special rules for labor costs, cooperative/condominium rules, allocation requirements, and basis adjustments.

Qualified Geothermal Heat Pump Property

Sec. 25D(d)(5)(B)(i) defines a geothermal heat pump as a piece of equipment that uses the ground or groundwater as a thermal energy source to heat a structure and/or as a thermal energy sink to cool a structure. For the geothermal heat pump to be a qualified heat pump, Sec. 25D(d)(5)(B)(ii) requires that it meet the eligibility criteria of the EPA's Energy Star program in effect during the time the...