By David Diaz, Chief Strategy Officer, Walker Blue LLC
When we work with ESCO teams serving school districts, colleges, municipalities and other public-sector customers, the same ITC questions come up again and again.
These are eight we heard repeatedly between April and September 2026. We kept the questions close to how they were actually asked and the answers practical enough to forward internally or directly to a customer.
The rules below reflect federal law and guidance as of September 2026. Project-specific facts can change the answer.
1. Is the entire project amount eligible for the ITC? If not, what elements are not?
Usually not.
For geothermal heat-pump projects, eligible basis generally starts with the equipment that performs the qualifying function and can also include property that is functionally interdependent with, or integral to, that equipment.
That can include the heat pumps, ground-loop field, drilling, circulating pumps, loop piping, controls, installation labor and certain properly capitalized indirect costs. Other building systems may qualify in whole or in part when they are integral to the geothermal system, but that determination depends on the actual design.
For an ESCO, the important point is that eligible basis should be built from the actual drawings and cost documentation, not estimated as a percentage of the total project cost.
We typically work from the schedule of values, drawings, submittals, invoices and pay applications to separate qualifying costs from general building improvements.
On one Kentucky project, for example, approximately 91% of a $937,030 project cost was included in the ITC basis. On much larger campus programs, the qualifying percentage can be dramatically lower because the geothermal scope is only one part of a broader capital project.
2. Who claims the credit when our customer is a school district?
Start with ownership.
If the school district owns the qualifying energy property, the district is generally the taxpayer for the credit. As an applicable entity, it may be able to make an elective payment election under Section 6417, commonly called Direct Pay.
The ESCO does not claim the credit simply because it designed, procured or installed the system.
If the ESCO, developer or another taxable third party owns the qualifying property, that owner generally holds the credit. Depending on the credit and structure, a taxable owner may use the credit against its own tax liability or transfer an eligible credit to an unrelated taxpayer for cash under Section 6418.
That ownership question should be answered before the incentive is built into the proposal. Assuming the credit belongs to the wrong party can materially change the economics of the project.
3. So if we get done in December and they don’t file until September the next year, could payment really be delayed that long?
Yes.
Direct Pay is tied to the owner’s tax year, not simply the project’s completion date.
If a system is placed in service in December 2026 and the owner has a June 30 fiscal year-end, the credit falls into the tax year ending June 30, 2027. The return for that year cannot be filed until the tax year closes.
IRS pre-filing registration also cannot be completed until the property has been placed in service.
That timing can create a real cash-flow issue for public-sector projects.
In Walker Blue engagements where the return and registration were handled promptly, we have often seen payment roughly 16–20 weeks after fiscal year-end. That is project experience, not a guaranteed IRS processing period.
Owners and ESCOs should model that timing early and consider how the completion date, bridge financing or a different ownership structure could affect the proposal.
4. Our project is under one megawatt. Does that mean we avoid prevailing wage and apprenticeship requirements?
Potentially.
Under Section 48, an energy project with a maximum net output of less than one megawatt of electrical or thermal energy can qualify for the increased ITC rate without satisfying the prevailing wage and apprenticeship requirements.
For electricity-producing projects, capacity is generally evaluated using AC output. Thermal projects require the applicable thermal-capacity analysis.
The second issue is project aggregation.
Putting multiple systems on the same campus does not automatically mean each one receives a separate one-megawatt threshold. For Section 48 property such as geothermal heat pumps, the Section 48 regulations contain factors for determining when multiple energy properties are treated as one energy project. For Section 48E projects, the aggregation test is different and sits in Treas. Reg. §1.48E-3.
So the question is not simply:
“Is this piece of equipment under 1 MW?”
It is:
“What is the energy project for tax purposes, and what is its maximum net output?”
Before relying on the exception, make sure the project team has documented that conclusion.
5. Can you explain the difference between being paid versus having a signed invoice?
This distinction matters for the 5% Safe Harbor.
One way to establish beginning of construction is for the taxpayer to pay or incur at least 5% of the total cost of the energy property, subject to the applicable beginning-of-construction and continuity rules.
A signed invoice by itself does not necessarily establish that.
For a cash-method taxpayer, the analysis generally focuses on what has actually been paid. For an accrual-method taxpayer, when a cost is incurred depends on the tax accounting rules, including economic performance. The 3½-month rule can also apply in certain situations where payment is made before property or services are received. Under that rule, the test is whether the taxpayer reasonably expected delivery within 3½ months at the time of payment; Notice 2020-41 confirms that a later delivery slip does not undo it.
There is another point ESCO teams need to keep in mind:
If the customer will own the system, the customer’s costs are what matter for the customer’s beginning-of-construction position. An ESCO invoice does not automatically establish that the customer has paid or incurred the same amount for federal tax purposes.
For wind and solar projects only, the 2025 legislation added a placed-in-service deadline: projects that did not begin construction by July 4, 2026 must be placed in service by December 31, 2027 to qualify for the Section 48E credit. With July 4 behind us, the June 6, 2026 court decision vacating IRS Notice 2025-42 does not help new wind and solar work. It matters for projects above 1.5 MW that relied on the 5% Safe Harbor between September 2025 and July 4, 2026, and those positions still carry the risk of reversal on appeal.
6. These are behind-the-meter projects, so is the end user the customer?
Behind the meter tells you where the system connects.
It does not tell you who owns the tax credit.
If the end user owns the qualifying energy property, that entity is generally the taxpayer and, if eligible, may make a Direct Pay election.
If an ESCO, developer or financing party owns the system and provides energy or services to the end user, the owner is generally the taxpayer and the end user is the customer.
For ITC purposes, ownership and the contractual structure matter more than which side of the meter the equipment sits on.
7. We are trying to determine what will be required from a domestic-content standpoint.
First determine which credit applies, because the percentages are not identical. Geothermal heat-pump property generally remains under Section 48, while most other clean-electricity projects now fall under Section 48E.
For Section 48 geothermal heat-pump property, the domestic-content rules generally use a 40% adjusted percentage for manufactured products, together with the applicable steel-and-iron requirements.
For Section 48E projects, the manufactured-products threshold is different: it is 50% for projects beginning construction in 2026 and 55% for projects beginning construction after 2026.
Domestic content matters for two separate reasons.
For qualifying projects it can provide a 10-percentage-point ITC bonus when the increased credit rate applies (2 percentage points when it does not).
It can also affect Direct Pay. For applicable entities using elective pay, projects that do not satisfy the domestic-content requirement can face a reduction in the elective payment amount. For Section 48E projects beginning construction after 2025, that reduction can reach zero unless the project is under the applicable one-megawatt threshold or another statutory or transitional exception applies. Section 48 has no comparable step to zero for geothermal heat-pump property. For projects beginning construction before January 1, 2027, the Notice 2024-84 attestation can protect the full elective payment, which matters for anyone pricing 2027 work.
The practical takeaway is to address domestic content during procurement, not at tax-return preparation.
The documentation also needs to support the actual tax rule being claimed. A general “Made in USA” statement or BABA compliance letter may be useful evidence, but it does not automatically establish compliance with the federal tax-credit domestic-content rules.
Domestic content is also a different test from the prohibited foreign entity (PFE) rules added by the 2025 legislation. The material-assistance rules apply to Section 48E, 45Y and 45X claims and do not reach a Section 48 geothermal heat-pump claim. Where they apply, the PFE cost thresholds are separate from the domestic-content percentages and run higher for battery storage.
Get those documentation requirements into the procurement package before the equipment is ordered.
8. The CHP will run on natural gas. Will that preclude it from the credit?
For a new CHP project beginning construction now, traditional CHP treatment under Section 48 is no longer available. Section 48 requires combined heat and power system property to have begun construction before January 1, 2025.
A natural-gas CHP system also generally does not qualify as a zero-emissions electricity facility under Section 48E.
Fuel cells are different, and that distinction matters because they commonly run on natural gas.
The 2025 legislation added qualified fuel-cell property to Section 48E for construction beginning after December 31, 2025. Qualified fuel-cell property can receive a flat 30% ITC without satisfying the normal zero-emissions requirement.
That 30% rate is fixed: the usual Section 48E bonus adders do not increase it.
Qualified fuel-cell property still has to pass the electricity-only efficiency test (greater than 30%), which is an engineering check, and as Section 48E property it is subject to the prohibited foreign entity rules.
Waste-heat-recovery opportunities are a separate analysis and should be evaluated independently before they are included in project economics.
What is the ninth question?
Every question above came from an actual ESCO team or project partner.
If your team is working through an ITC question that is not on this list, send it to us. Chances are another ESCO team is asking the same question.
Pricing a 2027 project?
Walker Blue supports ESCOs nationally with proposal-stage ITC eligibility and basis analysis, Direct Pay planning, prevailing wage and apprenticeship compliance, domestic-content analysis, and the documentation file through project closeout.
Send us the project scope and ownership structure, and we can help determine what needs to be addressed in the ITC analysis.
