You asked for a description of tax and other financial incentives for ground-based heat pumps, sometimes called geothermal systems. The information on federal incentives in this report comes from the Department of Energy's Database on State Incentives for Renewables and Efficiency, www. dsireusa. org, which describes federal and state incentives for many renewable resources. OLR report 2008-R-0543 discusses the pros and cons of geothermal systems.

SUMMARY

Connecticut exempts residential and commercial geothermal systems from the sales and use tax and from the property tax. The electric companies offer rebates to customers who install geothermal systems in existing or new buildings. In addition, the Office of Policy and Management has proposed allocating $ 5 million from funding the state will receive under the federal stimulus bill to provide rebates for residential and commercial geothermal systems.

Federal law provides a 30% credit against the income tax for qualifying residential geothermal systems. Commercial systems are eligible for a 10% investment tax credit against corporate taxes and for accelerated depreciation.

STATE INCENTIVES

Connecticut exempts geothermal systems from the sales and use tax and from the property tax. The exemptions apply to residential and commercial systems. The sales and use tax exemption also covers related equipment and system installation.

The electric companies offer rebates to residential customers who install geothermal systems in existing or new homes. The systems must be Energy Star rated. In the case of new homes, the home itself must also be Energy Star rated. The system also must have an energy efficiency ratio or coefficient of performance (measures of system efficiency) of 80% or more. The geothermal rebate is $ 500 per nominal ton of air conditioning capacity for successfully commissioned geothermal systems. (A ton of capacity is needed to air condition 600 to 800 square feet. Commissioning verifies that energy efficiency or renewable energy measures perform as planned. ) The rebate is capped at $ 1,500 per customer meter. Further information about this rebate is available at www. cl-p. com.

The companies also offer incentives for commercial customers. The incentive is determined in advance based on the system's energy savings. For qualifying systems with a capacity of up to 11. 25 tons, the incentive is $ 150 per ton. For larger systems, the incentive is determined on a case by case basis.

In addition to these existing incentives, the Office of Policy and Management (OPM) has proposed allocating $ 5 million from funding the state will receive under the American Recovery and Reinvestment Act of 2009 (the stimulus bill) for geothermal incentives. The incentives will take the form of rebates based a system's capacity. The Clean Energy Fund will administer the rebates, which will be available to residential and commercial customers who install systems in existing or new buildings. OPM anticipates that the Department of Energy will approve its plan in approximately two months.

FEDERAL

Commercial

Federal law provides a business energy investment tax credit equal to 10% of expenditures on geothermal systems, with no maximum credit. Eligible geothermal energy property includes geothermal heat pumps and equipment used to produce, distribute, or use energy derived from a geothermal deposit. This credit applies to eligible property placed in service after October 3, 2008.  The American Recovery and Reinvestment Act of 2009 (the stimulus bill) repealed a previous limitation on the use of the credit for eligible projects also supported by subsidized energy financing (e. g. , from Connecticut's Clean Energy Fund). For projects placed in service after December 31, 2008, this limitation no longer applies. Credits are available for eligible systems placed in service on or before December 31, 2016.

Under the federal Modified Accelerated Cost-Recovery System (MACRS), businesses may recover investments in certain property through accelerated depreciation deductions. The MACRS establishes a set of class lives for various types of property, ranging from three to 50 years, over which the property may be depreciated. Geothermal systems and several other renewable energy technologies are classified as five-year property.

Residential

A taxpayer may claim a 30% credit against the income tax for qualified expenditures for a geothermal system that serves a dwelling located in the United States that the taxpayer uses as his or her residence (not necessarily his or her primary residence). To be eligible for the credit, the system must meet federal Energy Star program requirements in effect when the installation is completed. Systems must be placed in service on or after January 1, 2008, and by December 31, 2016.  A system is considered to be placed in service when it is installed or, in the case of a new home, when the homeowner occupies the home. Expenditures include labor costs for onsite preparation, assembly or original system installation, and for piping or wiring to connect a system to the home.

If the credit exceeds tax liability, the excess amount may be carried forward to the succeeding taxable year. The American Recovery and Reinvestment Act of 2009 repealed a previous limitation on the use of the credit for eligible projects also supported by subsidized energy financing. For projects placed in service after December 31, 2008, this limitation no longer applies.  

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