Two years after being passed into law, the Inflation Reduction Act (IRA) still has plenty of questions surrounding the application of funds on various projects. The legislation provides remarkable incentives for geothermal projects of all kinds through the year 2032. In addition to impressive tax credits, funds can be distributed directly from the IRS in the form of a check for organizations and institutions meeting the requirements.

The IRA includes prevailing wage verbiage. It requires the use of union or equivalent labor resources for all projects more than 1 megawatt in size. The base credit for geothermal systems is 6% of the project’s cost. It goes up five times for using union labor to 30% of the project’s value. 

The incentives apply to almost everything associated with a geothermal HVAC system, including HVAC equipment, excavation, drilling, distribution of heating and cooling resources, and electrical and control upgrades.

The Buy America requirement (domestic content) makes choosing American-made products obvious, providing up to 10% additional incentives on top of the base credits. Domestic content is a huge bonus.

Projects constructed on indigenous lands provide up to 10% additional incentives if they meet the requirements. 

What does the IRA do for geothermal projects?

The IRA significantly changed the Investment Tax Credit (ITC) and Production Tax Credit (PTC) for renewable energy projects. The IRA extended the ITC for facilities that begin construction before 2025. It also made the ITC and PTC more valuable and expanded the types of qualifying projects. 

The legislation offers tax credits and other incentives for geothermal projects, including:

• Investment tax credit. The ITC is a tax credit allowing taxpayers to reduce their tax liability based on a percentage of eligible investment costs. The IRA replaced the traditional ITC with the Clean Electricity Investment Tax Credit (CITE), effective in 2025. The CITE is available to commercial taxpayers who install or expand a new clean electricity or energy storage facility. The project must include a zero or net-negative life cycle emissions rate to qualify. 

It offers a 30% credit for new geothermal facilities or a 6% base credit for commercial building owners with a bonus of up to 30%. The credit can be increased by 10% for facilities in certain energy communities.

• Production tax credit. This is a $25/megawatt-hour credit for geothermal power plants’ first 10 years of operation. 

• Advanced energy manufacturing credit. This $4 billion credit is for communities where coal plants or mines have closed. 

• 179D deduction. The per-square-foot deduction for energy-saving improvements applies to commercial buildings. 

• Accelerated depreciation. This provides a five-year cost recovery schedule for commercial geothermal heat pump systems. 

• Bonus depreciation. This is an additional incentive for geothermal energy systems. 

• Credit carryback. This is an extension of the ITC carryback period to three years. 

The IRA also provides guarantees for large-scale energy projects that use innovative technology to reduce greenhouse gas emissions.

How does the IRA provide funding for geothermal projects?

The IRA primarily funds geothermal projects through a significantly expanded ITC, offering a 30% tax credit on the cost of eligible geothermal installations. Additional bonus credits are available if projects meet certain criteria, such as using domestic content or adhering to prevailing wage requirements, essentially allowing developers to deduct a large portion of their project costs from their taxes, making geothermal projects more financially viable. 

Key points about the IRA and geothermal funding: 

• The base ITC for geothermal projects under the IRA is 30%, significantly higher than previous rates. 

• Additional bonus credits can be earned by meeting specific requirements, such as using domestic materials or employing a certain number of apprentices. 

• The IRA particularly incentivizes commercial geothermal heat pump installations with a generous tax credit. 

• Nontaxed businesses unable to take advantage of a tax credit (such as schools and dot-orgs) can access funding through direct grants. 

Project timeline:

• The IRA extends the eligibility period for geothermal ITC, allowing projects that started before a certain date to qualify for the full credit. 

• Additionally, geothermal projects are eligible for maximum funding through 2032, with a gradual reduction until expiring in 2034.

What assurance do we have that the IRA will fund a geothermal project?

It’s common for scrupulous investors and owners to be skeptical of federal or local incentives that promise high returns. If a project costs millions of dollars and the motivation to move forward is the promise of high incentive returns, the investor will want assurances from his certified public accountant (CPA) or other means. 

Few CPA firms have the experience to provide these assurances, especially when considering how new the IRA is. Also, the list of firms that have taken advantage of these incentives is brief, primarily because the program is only about two years old. 

IRA funding insurance is an opportunity to provide the assurances needed. One such company is AON, a global professional services firm providing a broad range of risk mitigation tools, such as tax credit insurance.

AON says that because of the passage of the IRA, it anticipates several projects seeking certainty around project funding. One of those concerns is a new provision: prevailing wage and apprenticeship standards. 

Taxpayers must pay laborers and mechanics at least the prevailing wage for the type of work performed in the geographic area. The prevailing wage is the combination of the hourly wage and any fringe benefits. The labor secretary determines the prevailing wage rates. 

Taxpayers who meet these requirements can increase the base amounts of certain incentives by five times. Some exceptions exist where taxpayers may be eligible for the five-times increase without meeting the requirements. 

For geothermal systems, any project greater than 1 MW must use prevailing wage standards. A megawatt is about 284 tons of cooling or heating capacity.

Thanks to Doug Baldessari of Baker Tilly for much of the information and some of the images provided in this column.