Geothermal heat pump (GHP) technology is rapidly gaining momentum across commercial, institutional, and public-sector real estate projects as organizations look for reliable, energy-efficient pathways to lower their carbon footprint and control energy costs. Recent policy developments, particularly the Inflation Reduction Act (IRA), have contributed to the growth of geothermal heating systems by introducing robust tax incentives and long-term certainty for organizations planning geothermal heating infrastructure projects. Both taxable entities and exempt organizations — including schools, universities, municipal governments, and other public institutions — can benefit from the GHP energy credit through elective pay. This article outlines what geothermal property is credit eligible, how Section 48 credits work, what costs qualify, and what steps organizations should take to maximize incentives.
Understanding geothermal technologies
To avoid confusion, it’s helpful to distinguish between the two types of geothermal technologies eligible for federal energy credits:
- Electricity producing geothermal systems (geothermal power plants). These systems extract heat from deep underground reservoirs to generate electricity. Geothermal power plants (GPP) rely on high temperature geothermal resources capable of producing steam or heated fluids that drive a turbine. Eligibility for the Section 48E clean electricity ITC applies only to geothermal technologies that generate electricity. Electricity producing geothermal projects are utility scale renewable energy infrastructure and are distinct from building level heating and cooling systems. GPP systems that began construction before Jan. 1, 2025, qualify for an ITC under Section 48, while Section 48E requires that the property be placed in service after Dec. 31, 2024.
- Geothermal heat pump (GHP) systems. GHPs don’t produce electricity. Instead, they use the stable temperature of the ground below the surface to provide heating and cooling for buildings. Due to their lack of energy generation, they fall exclusively under Section 48, not Section 48E. GHP systems are unique in their eligibility for Section 48 through 2032, while credits for most other renewable technologies transition to Section 48E or sunset. Most commercial, institutional, and public sector geothermal installations, including those in schools, campuses, and municipal buildings, use GHP technology. Unlike geothermal power plants, GHP systems are designed to replace or supplement traditional HVAC equipment rather than generate power.
This distinction is important because credit types, phaseouts, and applicable rates differ between the two technologies. The below explores how organizations making investments in GHP technologies can maximize tax credits.
Stability among change: Geothermal heating and the Inflation Reduction Act
The passage of the One, Big, Beautiful Bill Act (OBBB) curtailed the renewable energy credit landscape originally broadened by the IRA. The looming Dec. 31, 2027, phaseout date for solar and wind investment tax credits (ITCs) and production tax credits (PTCs) has left taxpayers and organizations racing to complete large-scale projects. However, a critical exception remains related to credits for geothermal heat pumps (GHP) under Section 48. Backed by strong bipartisan support, these credits provide long-term certainty for developers, taxpayers, and exempt organizations, reinforcing the role of geothermal energy as a long-term, predictable incentive for energy-efficient building heating and cooling.
Investment tax credit calculation for geothermal heating projects
The ITC allows organizations to claim a credit when qualified property is placed in service. Geothermal heating and cooling systems are qualified property under the ITC. The credit is calculated as a percentage of the cost basis in the property, starting with a base rate of 6% until 2032, then drops to 5.2% in 2033, 4.4% in 2034, and phases out entirely for projects beginning construction in 2035.
Projects meeting additional criteria, such as having a maximum net output of less than one megawatt or satisfying prevailing wage and apprenticeship (PWA) requirements, may qualify for an enhanced rate of 30%. Additional 10% increases apply to credits for GHP property that begins construction before 2035 if the project uses domestic materials and is located in a designated energy community.
Notably, complexities introduced with the OBBB related to Foreign Entities of Concern (FEOC) rules that can impact eligibility for the 48E credit, don’t impact credits for GHP technologies.
Eligible costs of geothermal heat pump projects
Many mistakenly believe that only components unique to geothermal energy systems, such as wells, pumps, and circulation piping, qualify for the credit. In reality, IRS regulations broaden eligibility to include both integral and functionally interdependent property.
- Integral property refers to components essential to the energy system’s operation and directly used in its intended function.
- Functionally interdependent property includes components that rely on other parts of the system to perform their intended function.
Applied to GHP systems, this means that inverters, converters, and heating, ventilation, and air conditioning (HVAC) systems such as blowers and furnaces, may also qualify because they’re necessary for the overall functionality of the property. These expanded definitions significantly increase the costs eligible for the credit, delivering a more substantial benefit. For example, a university replacing aging boilers with a GHP system may find that not only the wells and heat pumps qualify, but also the distribution equipment and a portion of the construction-related soft costs.
Although a wide range of components may qualify for the credit due to their integral or interdependent nature, eligibility ultimately depends on the specific details of each system. Components that are essential to the system’s functionality are eligible, while unrelated HVAC equipment and building structures are not.
Strategic planning and risk mitigation for geothermal heat pump projects
Cost segregation studies are crucial when navigating this complexity. These studies analyze project costs, identify property eligible for energy credits, and determine the correct basis for the ITC. An ITC-targeted cost segregation study can also ensure that all eligible costs, including allocable portions of certain construction-related soft costs, are included in credit-eligible basis.
Maximizing available credits also requires meeting PWA requirements and domestic content standards. To substantiate that such requirements are met demands meticulous documentation.
For PWA compliance, property owners must confirm, among other things, that:
- All laborers and mechanics employed by the property owner, contractors, and subcontractors are paid federal prevailing wages for the construction type and location.
- Worker classifications and hours align with Department of Labor determinations.
- Registered apprentices are paid prevailing wages, are adequately supervised, and perform the required percentage of total labor hours, or employers document a good-faith effort to comply.
While contractors typically manage construction and installation, project owners can’t rely solely on their assurances of compliance when it comes to satisfying the PWA requirements. Contracts should mandate comprehensive documentation throughout the project. Although IRS rules offer corrective measures to address the lack of adequate records, these come with strict deadlines and interest charges, making proactive oversight essential for securing enhanced credits.
Domestic content standards present additional challenges, as contractors and suppliers may hesitate to disclose cost details. Entities claiming geothermal tax credits should develop procedures to collect domestic content data using methodologies that minimize risk while acknowledging the challenges of obtaining vendor cost data. Engaging experts at the outset and setting clear expectations with project suppliers ensures smooth collection of support for credit eligibility.
Key takeaways for geothermal heat pump projects
In a time of shifting energy policy, GHP systems remain a reliable, resilient, and cost-effective cornerstone of sustainable building strategy. Unlike solar and wind, which are subject to accelerated phaseouts under recent legislation, GHP remains eligible for the ITC, offering certainty when planning long-term building and infrastructure projects. By engaging tax advisors early and leveraging cost segregation studies, organizations can maximize credits while minimizing compliance risk.
