Federal residential energy efficient property credits have been available for over a decade; first established by The Energy Policy Act of 2005 in relation to solar equipment, and further expanded to include wind and geothermal incentives with The Energy Improvement and Extension Act of 2008. The Federal geothermal tax credit has expired and been extended several times over the years and was again reinstated in the Bipartisan Budget Act of 2018 and is now available through 2021. It is available for geothermal heating and cooling equipment that meets the Energy Star requirements, and is used in a taxpayer’s residence in the United States. The Federal tax credit amount is 30% of costs for tax years through 2019, 26% of cost for tax year 2020, and 22% of costs for tax year 2021. Form 5695 Residential Energy Efficient Property Credit is used to claim the Federal credit.
The Iowa tax credit for geothermal heat pumps was originally first available in 2012 and was based on a percentage of the related Federal tax credit. This Iowa credit was slated to be available through tax year 2016, but after its sunset was reauthorized through 2020. Because of the delay in extending the Federal residential energy credits that expired in 2016, Iowa enacted a second geothermal tax credit similar in nature to the original credit, except it was not dependent on the Federal credit. Both the original and additional geothermal state credits were eventually repealed by 2018 Iowa legislation for tax years after January 1, 2019.
The Iowa credit proved popular, and the Iowa Department of Revenue Fiscal Services Division reported estimated annual state geothermal heat pump credits claimed from FY 2013-2018 totaling $10.5 million. Energy credits remain important in Iowa, and House File 779 was signed and enacted by Governor Reynolds on May 16, 2019 that included a newly created Iowa Code Section 422.12N to cover a new geothermal heat pump tax credit.
The new Iowa credit retroactively applies to tax years beginning on or after January 1, 2019 and amounts to 20% of the Federal Residential Energy Efficient Property tax credit allowed for geothermal heat pumps, provided in IRC Section 25D(a)(5) for residential property located in Iowa. State credits in excess of the Iowa tax liability are not refundable, but may be carried forward ten years.
Two important changes to the Iowa Geothermal Heat Pump Tax Credit:
Taxpayers must apply for the new credit
There is now a one-million-dollar annual credit cap
To request a Geothermal Heat Pump Tax Credit for installations after January 1, 2019, taxpayers are required to have the application submitted by May 1 following the year of installation and have an approved credit certificate in hand to take the credit on a tax return. The applicant must be the resident of the home where the installation is installed. Applications filed by the taxpayer by the May 1 due date, but have not yet been approved by the department will be put on a waitlist in order of submitted applications, and have priority of being approved in the following year. However, being put on the waitlist unapproved does not guarantee approval in the following year, and the submission will still be subject to the one-million-dollar credit cap. According to the Iowa Department of Revenue, if taxpayers attempt to make a claim to the tax credit on their return without an award, the claim will be denied and the taxpayer will likely be ineligible to reapply for that tax year by the time they receive the denial, given the May 1 application deadline.
The Iowa Department of Revenue will accept and approve applications for the Geothermal Heat Pump Tax Credit on a first come, first serve basis up until the annual tax credit cap of one million dollars has been reached. If the one-million-dollar cap is reached for a tax year, the department will establish a waitlist for credits to be applied in the following year. If the one-million-dollar tax credit cap is unmet in a tax year, the amount unclaimed will add to the next year’s cap.
The application for The Geothermal Heat Pump Tax Credit is available on the state Tax Credit Award, Claim & Transfer Administration System (CACTAS) https://taxcredit.iowa.gov/home. Taxpayers will need to create an account if one has not already been created to be able to use the system. Once logged in, a taxpayer will need to upload a copy of their geothermal system invoice, and also download, sign, and upload the certification document available within the application.
Given the application and approval deadlines, as well as the new credit caps and potential waitlists, it has become clear that it’s important to timely and completely submit an application as soon as possible! Contact your tax professional to help you further understand the new procedures, as it will be imperative for securing a credit.
Amie K