One geothermal credit went to zero in 2025. The one that heats and cools buildings still runs through 2034 construction starts.
By Josh Howes, CEO, Walker Blue
Technical review by John Kapral, JD, CPA, LLM, Senior Director of Renewable Energy Tax Incentives and Credits
Bottom line. Commercial geothermal heat pump projects may qualify for a 30% federal investment tax credit on eligible basis when prevailing wage and apprenticeship requirements are met, for construction beginning through 2032, with reduced rates through 2034. Geothermal heat pump property stays under Section 48 and outside the material assistance cost-ratio rules that the 2025 law applied to §45Y, §48E and §45X, although domestic-content phaseout rules remain relevant for applicable entities using elective pay. One important distinction: direct-use geothermal energy property is a different category of §48 property, and its applicable percentage dropped to zero for construction beginning after June 15, 2025.
For wind and solar under §48E, the July 4, 2026 beginning-of-construction cutoff has passed, and projects beginning later generally face a December 31, 2027 placed-in-service termination. I spent the weeks around that cutoff at NAESCO in San Francisco, where the same question kept surfacing in different forms. What still pencils, what still closes, and what a lender still believes. Geothermal came up repeatedly. Did that credit die too?
The answer depends on which geothermal you mean. Here is the schedule, what it pays, and who can use it.
The short answer
Geothermal heat pump property may qualify for an investment tax credit under Section 48 of the Internal Revenue Code. Under Section 48 as currently in effect after the One Big Beautiful Bill Act, P.L. 119-21, enacted July 4, 2025, the schedule for that property runs on construction-start dates. The credit is 30% for projects that begin construction through 2032 when prevailing wage and apprenticeship requirements are met or a limited exception applies, 26% for 2033 starts, 22% for 2034 starts, and no credit for construction beginning in 2035 or later. The corresponding base rates, where those labor requirements are not met, are 6%, 5.2% and 4.4%. Walker Blue re-verifies these figures against current IRS guidance on each engagement, and any specific project should do the same.
There is no placed-in-service cliff in that schedule. What matters is when construction begins, properly documented, and whether the project meets the applicable requirements from there.
Not every geothermal credit survived
Four different things get called the geothermal credit, and they answer to different rules.
Geothermal heat pump property. Equipment that uses the ground, ground water or other underground fluids as a thermal energy source or sink to heat or cool a structure. This is §48(a)(3)(A)(vii) property and the subject of this article. It covers commercial, institutional and multifamily systems, from a single building to a campus loop field, and it is the property that kept its runway through 2034.
Direct-use geothermal energy property. Equipment that produces, distributes or uses energy derived from a geothermal deposit under §48(a)(3)(A)(iii). This one changed. The IRS correction to the 2025 Form 3468 instructions, issued March 27, 2026, sets the applicable percentage in three tiers by construction-start date. Construction beginning before 2025 is 30% where prevailing wage and apprenticeship requirements or a limited exception are met and 6% where they are not. January 1 through June 15, 2025 is 10% and 2%. After June 15, 2025 it is zero either way. Property can still meet the definition of geothermal energy property and receive nothing because of when construction began. Any project carrying a 30% assumption on direct-use geothermal with a 2025 or later start needs that assumption checked now.
Geothermal electricity. Facilities that generate electricity from geothermal resources, including enhanced geothermal systems, use the post-2024 clean-electricity credit regime. If the investment credit is claimed, that generally means §48E, with its emissions test, timing rules and foreign-entity restrictions. Different statute, different analysis.
Residential systems. Homeowner systems ran under §25D, which the 2025 law terminated for expenditures made after December 31, 2025. A commercial or institutional project is unaffected by that termination.
Why geothermal heat pumps kept their runway
The 2025 law changed the clean-energy credit landscape unevenly. Wind and solar under §48E now face a December 31, 2027 placed-in-service termination for projects beginning construction after July 4, 2026. Other §48E facilities beginning construction after December 31, 2025 also face prohibited-foreign-entity material assistance restrictions.
Geothermal heat pumps avoid both of those §48E changes because they remain under Section 48 on their own stepped schedule. Two consequences follow.
First, the runway. Projects entering design today can still target the full 30% rate with construction starting through 2032, and reduced rates through 2034. Long-lead items still require early action, including test wells, loop-field design, drilling capacity, procurement, labor planning and documentation.
Second, the sourcing rules. Notice 2026-15 provides interim guidance on the prohibited-foreign-entity material assistance rules, which the 2025 law applied to §45Y, §48E and §45X. Those cost-ratio rules do not reach a §48 geothermal heat pump claim, so that cost-accounting regime is not part of a geothermal heat pump credit file. If the same project includes an asset claimed under §48E, analyze that asset under the §48E rules separately. Elective-pay domestic-content rules are also separate for applicable entities, covered below.
For the full boundary between the two statutes, see our guide to Section 48 vs. Section 48E.
What the credit is worth
The §48 credit for geothermal heat pump property is 6% of eligible basis at the base rate, and 30% when the project meets prevailing wage and apprenticeship requirements. Projects below one megawatt may qualify for the increased rate without satisfying those labor requirements. For thermal property, Treas. Reg. §1.48-13(e)(5) converts one megawatt to 3.4 million Btu per hour of heating or 284 tons of cooling, and it measures the equipment that distributes thermal energy to the structure rather than the geothermal plant alone. Two assessments are permitted, either the aggregate maximum thermal output of the individual heating or cooling elements within the buildings, or the maximum thermal output the entire project can deliver at any given moment, with redundant equipment not operated at maximum output during normal operation excluded from the second measure. Those two measures rarely produce the same number, and on a campus job the difference can decide whether the labor requirements apply at all.
Bonus adders for domestic content and energy-community location may raise the amount further, and the stack can reach 50% of eligible basis when all applicable requirements are met.
Eligible basis is where engineering meets tax. The heat pump equipment qualifies. The preamble to the final §48 regulations states that although the statute does not expressly identify energy distribution equipment or components of a building’s heating and cooling system as geothermal heat pump property, such equipment may be integral to that property’s function of heating or cooling the structure and may therefore be treated as geothermal heat pump property. The qualifier is integral to that function, not merely useful to the building HVAC system. Equipment serving domestic hot water sits outside the statute, because the statutory hook is heating or cooling a structure and service water heating is a different end use.
Most campus and district systems are hybrids, with a boiler, a supplemental chiller or a cooling tower alongside the ground loop, which puts the shared property into the dual-use rules. Dual-use equipment is eligible only to the extent qualifying energy is at least 50% of annual use, and that percentage is tested again in each year of the recapture period. Decisions made in design development, including ground-loop fluid, borehole count and how internally recovered heat is counted, move that percentage and therefore move the credit. On a campus-scale system, the quality of the cost allocation and the load accounting behind it can materially affect both the credit amount and how well the claim holds up under review.
Who captures it, and how
The capture path depends on who owns the system.
Taxable owners may claim the credit against federal tax liability or, if eligible, transfer all or a portion of the credit to an unrelated buyer for cash under §6418.
Tax-exempt and governmental owners that are applicable entities may receive the credit as a direct payment under §6417 elective pay after pre-filing registration. Two points here get misstated often enough to be worth stating carefully.
Domestic content. §48(a)(12)(B) applies rules similar to §45(b)(9)(B), and §45(b)(9)(C) fixes the adjusted percentage for manufactured products at a flat 40%. The escalating 40, 45, 50 and 55 schedule belongs to §45Y and, after the 2025 law, to §48E. It does not apply to §48. Because the elective safe-harbor tables in Notice 2024-41 and Notice 2025-08 cover solar, wind, storage and hydropower but not geothermal, a geothermal project generally must support the manufactured-products calculation with actual manufacturer direct-cost data unless another applicable method becomes available. The steel and iron requirement is separate and is 100% domestic. That means procurement planning needs lead time for manufacturer cost data and, in many cases, nondisclosure agreements.
The elective payment phaseout. §48(a)(13) applies rules similar to §45(b)(10). Under §45(b)(10), the applicable percentage is 100% for a facility that satisfies domestic content or has maximum net output below one megawatt, 100% for other pre-2024 starts, and 90% for 2024 starts. Unlike §45Y and §48E, §45 does not state an 85% percentage for 2025 starts or a 0% percentage for later starts. Because §48(a)(13) incorporates rules similar to §45(b)(10), the Code does not expressly specify a post-2024 percentage for a §48 elective-pay project. That is a point to confirm under current guidance rather than resolve by importing the §45Y or §48E schedule. The under-one-megawatt exception in §45(b)(10) is written in alternating-current electrical terms and does not expressly provide a thermal conversion, so a thermal-only project should confirm rather than assume that the §1.48-13 conversion carries over. Separately, Notice 2024-84 extends transition procedures for the statutory domestic-content exceptions for projects beginning construction before the later of January 1, 2027, or further guidance, subject to the required good-faith determination, attestation and records.
The full elective-pay sequence, from registration to payment, is covered in Direct Pay for Schools.
What the file has to contain
The credit is claimed on a return, but it is built on a project record. Three parts of that record decide whether the claimed amount holds up.
Construction-start documentation. Because the schedule runs on beginning-of-construction dates, the file must establish one through physical work of a significant nature or the 5% safe harbor, with continuity from there. Notice 2018-59 names geothermal heat pump property expressly and treats installation of ground heat exchangers, heat pump units and air delivery systems as physical work of a significant nature, while test drilling to determine soil conditions is a preliminary activity that does not count. The 2025 guidance narrowing the safe harbor for wind and solar reaches §45Y and §48E facilities and does not govern §48 property. Where a project drills a pilot or test borehole, the question worth developing early is whether that borehole will be designed, contracted and completed as a permanent ground heat exchanger incorporated into the final borefield.
Labor records. Where prevailing wage and apprenticeship requirements apply, the 30% rate rests on payroll-level documentation across contractor tiers, collected during construction. Reconstructing that record after the fact can be costly and incomplete.
An engineering-based eligible-basis study. Eligible basis should be determined by someone who understands both the tax definition and the mechanical system, with the allocation documented to a standard an examiner can follow.
Frequently asked questions
Did the 2025 tax law end the geothermal tax credit?
Not for geothermal heat pumps. Commercial geothermal heat pump property remains under Section 48, with a stepped schedule for construction starts through 2034. The 2025 law separately ended §25D after 2025, accelerated wind and solar timing, and reduced the applicable percentage for direct-use geothermal energy property to zero for construction beginning after June 15, 2025.
How much is the commercial geothermal heat pump tax credit?
Generally 30% of eligible basis for construction starts through 2032 when prevailing wage and apprenticeship requirements are met or a limited exception applies, 26% for 2033, and 22% for 2034. The corresponding base rates are 6%, 5.2% and 4.4%; qualifying adders may increase the credit.
Can a school district or nonprofit claim it with no tax bill?
Potentially. Applicable entities can use §6417 elective pay after pre-filing registration. Domestic-content phaseout rules under §48(a)(13) require project-specific review because §48 does not state the 85% and 0% post-2024 schedule used in §45Y and §48E, and Notice 2024-84 transition procedures may apply.
Do the foreign-entity sourcing rules apply to geothermal heat pumps?
No, not the material-assistance cost-ratio rules in Notice 2026-15. Those rules apply to §45Y, §48E and §45X, not a §48 geothermal heat pump claim. Analyze any §48E assets separately. Elective-pay domestic-content rules are a different issue.
Is there a deadline to begin construction?
Yes. The full-rate window runs through 2032 construction starts, reduced rates apply in 2033 and 2034, and no §48 geothermal heat pump credit is available for construction beginning in 2035 or later. Design, procurement, labor planning and start-date documentation often create earlier practical deadlines.
Does a geothermal retrofit qualify, or only new construction?
Both can. The credit attaches to qualifying energy property, not building age. A retrofit replacing conventional HVAC with a ground-source system can qualify, subject to the equipment, ownership, construction and eligible-basis facts.
Weighing geothermal on a project?
The credit amount is shaped in design and procurement: construction-start date, labor, sourcing, ownership, ground-loop design and eligible basis. For a 2027 or 2028 start, the practical question is whether the file is being built as the project advances. Walker Blue supports owners nationally with geothermal ITC eligibility, construction-start documentation, PWA compliance, domestic-content and elective-pay analysis, and audit-ready eligible-basis studies. Talk to our ITC team.
Published August 2026. Reviewed by John Kapral, JD, CPA, LLM. Regulatory content reviewed every six months or upon new IRS or Treasury guidance. Figures reflect law and guidance as of August 11, 2026. Walker Blue re-verifies flagged items on each engagement.
This article is for general information and does not constitute tax advice. Credit eligibility depends on project facts and documentation. Consult your tax advisor or Walker Blue for a project-specific review.
