Yes, geothermal systems serving district energy networks, campuses, and central plants may qualify for the federal Investment Tax Credit, and the runway is longer than most owners assume. While solar and wind face compressed construction-start timing under the One Big Beautiful Bill Act (P.L. 119-21, enacted July 4, 2025), geothermal heat pump property retained eligibility under §48 for projects that begin construction before January 1, 2035. For universities, municipalities, hospitals, and housing authorities, elective pay can convert that credit into a direct payment from the IRS, even with no federal tax liability.
The owners best positioned to capture this value are the ones who treat eligibility analysis and documentation as part of project development, not something to reconstruct after the system is in the ground.
Key Takeaways
- Geothermal heat pump (GHP) property, including ground-source systems serving campuses and thermal networks, qualifies under §48 for projects beginning construction before January 1, 2035.
- The credit is 6% base, or 30% when prevailing wage and apprenticeship (PWA) requirements are met, with potential 10% adders for domestic content and energy community siting. Rates phase down for projects beginning construction in 2033 and 2034.
- Electricity-producing geothermal qualifies under §48E, with a phaseout that generally follows the original IRA schedule beginning in 2034, far later than solar and wind.
- Tax-exempt owners can use elective pay under §6417 to receive the credit as a cash payment, subject to pre-filing registration and, for larger projects beginning construction in 2026 or later, domestic content requirements.
- Per current Treasury and practitioner guidance, the foreign entity of concern (FEOC) restrictions added by OBBBA do not reach geothermal heat pump property under §48, one less compliance layer than solar and storage carry.
Which Geothermal Systems Qualify, and Under Which Section?
Two different code sections cover geothermal, and the distinction matters for timing, compliance, and documentation.
Geothermal heat pump property qualifies under §48. This covers equipment that uses the ground or groundwater as a thermal energy source or sink, the ground-source heat pump systems, borefields, and related equipment behind campus thermal networks and building electrification projects. GHP property was not moved to the tech-neutral §48E credit, and it was not swept into the accelerated phaseouts OBBBA applied to solar and wind. Construction must begin before January 1, 2035.
Electricity-producing geothermal qualifies under §48E. Geothermal power generation placed in service after December 31, 2024 falls under the clean electricity ITC. OBBBA preserved a longer horizon here as well: the phaseout generally follows the original IRA schedule, beginning in 2034, rather than the compressed construction-start windows applied to solar and wind. Projects beginning construction in 2026 or later are subject to the FEOC material assistance rules, so supply chain documentation becomes part of the eligibility analysis (see IRS Notice 2025-42 on beginning of construction under §45Y and §48E).
For most IDEA-style district energy and campus owners, the relevant path is §48 GHP property. That is also the simpler one: per current practitioner commentary, the FEOC restrictions do not apply to GHP credits.
How Much Is the Credit Worth?
The base credit for §48 geothermal heat pump property is 6% of eligible cost. Meeting prevailing wage and apprenticeship requirements raises it to 30%. Two adders can stack on top of that for qualifying projects:
| Component | Potential value |
|---|---|
| Base credit (PWA met) | 30% |
| Domestic content bonus | +10% |
| Energy community bonus | +10% |
| Potential total | Up to 50% |
On a $20 million campus geothermal conversion, the difference between the 6% base and a fully documented 50% credit is $8.8 million. Those adders are not automatic. Each one carries its own qualification tests and documentation burden, and the credit rate phases down for GHP projects beginning construction in 2033 (26% with PWA) and 2034 (22% with PWA) before eligibility closes for construction beginning in 2035 or later.
Whether a specific project qualifies, and at what rate, depends on project facts, construction-start timing, and the documentation supporting each claimed component.
How Does Elective Pay Work for Tax-Exempt Owners?
Before the IRA, the ITC was effectively out of reach for entities without federal tax liability. Elective pay under §6417 changed that. Applicable entities, including state and local governments, public school districts, public universities, housing authorities, hospitals, and 501(c)(3) organizations, can now elect to receive the credit value as a direct payment from the IRS.
The mechanics matter:
- Pre-filing registration is mandatory. The entity must register the project with the IRS and obtain a registration number before filing the return on which the election is made.
- The election rides on a tax filing. Even entities that have never filed a federal return file Form 990-T with Form 3468 to claim the payment.
- Domestic content requirements phase in. For projects of 1 MW or greater beginning construction in 2026 or later, failing to meet domestic content requirements can eliminate elective pay eligibility entirely, unless an exception applies. Projects under 1 MW are exempt, and an increased-cost exception exists where compliant materials would raise costs by more than 25% (see Notice 2024-84 on attestation procedures). How the 1 MW threshold applies to thermal systems is an area where guidance is still developing, this is exactly the kind of question to resolve before construction starts, not at filing.
For a public university or municipal district energy system, this changes the capital math. A credit worth 30% or more of eligible cost, received as cash, is not a rounding error in a central plant pro forma. It is a funding source — but only for projects that clear the eligibility, registration, and documentation gates in the right order.
What Did OBBBA Change for Geothermal?
Less than the headlines suggested. OBBBA compressed construction-start timing sharply for solar and wind, and those deadlines have dominated the conversation since mid-2025. Geothermal came through differently:
- §48 GHP property kept its construction-start runway through 2034, with the phasedown schedule described above.
- §48E electricity-producing geothermal kept a phaseout beginning in 2034, generally tracking the original IRA schedule.
- FEOC restrictions, per current commentary, do not reach §48 GHP credits, though they do apply to §48E projects beginning construction in 2026 or later.
The practical consequence: as compressed timelines push some owners away from solar-first strategies, geothermal is one of the few technologies where the incentive structure still rewards multi-year capital planning. A campus that cannot realistically start a solar project in time can still plan a phased geothermal conversion across several fiscal years without losing access to the current credit structure, depending, as always, on construction-start and project qualification timing.
What Documentation Is Needed?
Eligibility on paper and a credit that survives review are two different things. For a district energy or campus geothermal project, the documentation stack typically includes:
- Beginning-of-construction support– physical work of a significant nature or the 5% safe harbor, with contemporaneous records (Notice 2018-59 for §48 property)
- Eligible basis analysis – engineering-level identification of which costs qualify as energy property
- PWA compliance records – certified payroll, apprenticeship ratios, and correction documentation if the 30% rate is claimed
- Domestic content substantiation – manufactured product and steel/iron analysis if the adder is claimed or if elective pay rules require it
- Pre-filing registration and election support for elective pay entities
Public-sector owners face audits, board scrutiny, and in some cases, federal funding overlays. The documentation should be built to that standard from day one.
Who This Applies To
- Universities and colleges converting campus heating and cooling to ground-source thermal networks
- Municipalities and district energy operators planning central plant modernization or thermal network expansion
- K-12 districts, hospitals, and housing authorities electrifying heating systems
- ESCOs and design-build teams structuring geothermal projects for tax-exempt clients, where credit value and compliance risk both land in the project economics
What Walker Blue Helps With
Walker Blue’s engineering and tax incentive teams support geothermal projects across the full eligibility lifecycle: ITC eligibility analysis, construction-start strategy, PWA compliance documentation, domestic content analysis, and elective pay registration support, built to audit-ready standards. We work directly with owners and as the technical bench behind ESCOs, CPAs, and design firms.
If you have a geothermal or central plant project in capital planning, the highest-leverage time to review eligibility is before construction starts.
FAQ
Does a ground-source heat pump system serving multiple buildings qualify for the ITC? GHP property serving campuses or thermal networks may qualify under §48, subject to project facts and construction-start timing before January 1, 2035.
Can a public university or city receive the ITC with no tax liability? Yes, potentially. Elective pay under §6417 allows applicable entities to receive the credit as a direct payment, subject to pre-filing registration and applicable domestic content requirements.
Did OBBBA eliminate the geothermal ITC? No. OBBBA compressed timing for solar and wind, but §48 geothermal heat pump credits remain available for projects beginning construction before January 1, 2035, with a phasedown beginning in 2033.
Do FEOC rules apply to geothermal heat pump projects? Per current practitioner commentary, the FEOC restrictions do not apply to §48 GHP credits. They do apply to §48E electricity-producing geothermal projects beginning construction in 2026 or later. Confirm against project-specific facts.
This article is for general information and does not constitute tax advice. Credit eligibility depends on project facts, construction-start timing, and documentation. Consult your tax advisor or contact Walker Blue for a project-specific review.
