What Colorado Energy Tax Credits Are Available?

A state tax credit is a dollar-for-dollar reduction of the income tax you owe to the state government. These credits are designed as incentives, encouraging taxpayers to engage in activities the state deems beneficial, like investing in renewable energy. The primary purpose of energy tax credits in Colorado is to advance the state’s environmental goals, including reducing greenhouse gas emissions and lowering overall energy consumption. For the taxpayer, these credits directly translate into lower tax bills and help offset the expense of upgrades.

Available Residential Energy Credits

One incentive is the state’s heat pump tax credit, effective January 1, 2024. This credit is for the installation of certain Energy Star certified systems. To qualify, the system must be installed by a contractor registered with the Colorado Energy Office and be designed to meet at least 80% of the home’s annual heating needs. Qualifying systems include:

• Air-source heat pumps
• Ground-source heat pumps
• Water-source heat pumps
• Heat pump water heaters

The heat pump credit is shared between the contractor and the customer. For installations in 2024 and 2025, registered contractors can claim a tax credit but must pass on a portion to the customer as an immediate discount. For an air-source heat pump, the total credit is $1,500, with the customer receiving a minimum discount of $499.95. For a ground-source heat pump, the credit is $3,000, with a minimum customer discount of $999.90, and for a heat pump water heater, the credit is $500, with a $166.65 minimum discount. This point-of-sale discount must be itemized on the customer’s invoice.

Another credit available to residents is for installing a qualifying residential energy storage system. This credit is for 10% of the purchase price of a battery storage system. The credit helps lower the cost of systems that store energy, often from a renewable source like solar panels, for later use. This incentive can be claimed by the homeowner on their tax return or assigned to the seller at the point of sale for an immediate discount.

For those investing in solar energy, Colorado offers a sales and use tax exemption for renewable energy equipment. This means residents do not have to pay the state’s 2.9% sales tax on the purchase of solar panels and related equipment, reducing the initial project cost. Homeowners can often combine these state-level incentives with federal tax credits, such as the Residential Clean Energy Credit, further improving the financial case for these upgrades.

Available Commercial Energy Credits

Businesses in Colorado can also take advantage of state and federal incentives to invest in energy efficiency and renewable energy. Commercial entities are eligible for the heat pump tax credit for installing qualifying technology in their buildings. The credit amount for commercial properties is calculated based on the heating capacity of the system, with contractors claiming $1,500 per 4 tons for an air-source system.

A federal incentive available to commercial building owners is the 179D Energy Efficient Commercial Buildings Tax Deduction. While a federal program, it has a direct impact on Colorado businesses making energy-efficient improvements. This deduction is available for projects that achieve a certain percentage of energy savings. For projects meeting prevailing wage and apprenticeship requirements, the deduction ranges from $2.83 to $5.65 per square foot, depending on the percentage of energy savings achieved.

Colorado businesses can also use the state’s sales and use tax exemption on renewable energy equipment. This can be paired with federal incentives like the Investment Tax Credit (ITC), which allows businesses to claim a percentage of the installation cost as a credit on their federal taxes.

Businesses that generate electricity from their renewable installations may also be eligible for the federal Production Tax Credit (PTC). This provides a per-kilowatt-hour tax credit for the first ten years of the system’s operation. If prevailing wage and apprenticeship requirements are met, the credit for electricity from resources like wind and geothermal is 2.9 cents per kWh, while the rate for sources like landfill gas is 1.5 cents per kWh.

Required Documentation and Forms

To claim Colorado’s energy tax credits, taxpayers must gather specific documentation and complete the correct forms. The Colorado Department of Revenue provides these forms on its website, and it is important to use the version corresponding to the tax year the expense was incurred. For electric vehicles, taxpayers need Form DR 0617, which requires the vehicle identification number (VIN), purchase date, and purchase price.

The form for the heat pump credit is DR 1322. While the contractor claims this credit, the customer’s invoice serves as proof of the point-of-sale discount. The invoice must show the discount labeled as “State of Colorado Heat Pump Discount” and list the make and model of the equipment. Homeowners claiming the Residential Energy Storage System Credit must file Form DR 1307, which certifies the system meets all eligibility requirements.

Beyond the specific state forms, taxpayers must retain all supporting documentation. This includes detailed purchase invoices, receipts that itemize costs, and any certification statements from installers or manufacturers. For example, proof of an installer’s registration with the Colorado Energy Office is necessary for the heat pump credit. It is also wise to keep records of any communication with contractors and copies of all submitted forms for personal records in case of an audit or inquiry from the Department of Revenue.

How to Claim the Credits

After gathering all necessary documents, the final step is to claim the credit on the Colorado income tax return. The total amount of the claimed energy credits is entered on the Colorado Individual Credit Form, 104CR. This form consolidates various state tax credits and is submitted as part of the complete state tax filing package with Form 104.

When filing electronically, tax preparation software will typically prompt for the credit information and attach the necessary digital forms to the return. If filing by paper, the completed credit forms must be physically attached to Form 104 as specified in the instructions. For certain credits, like the one associated with Form DR 1322, a paper return may be required because it needs signatures.

The claimed tax credits are applied directly against the taxpayer’s total state tax liability for the year. If the total credits exceed the amount of tax owed, the outcome depends on whether the credit is refundable. A refundable credit results in a refund payment for the excess amount, while a non-refundable credit can only reduce the tax liability to zero.