What Counts as Energy Property Under Section 48
Energy property under Section 48 is defined by unit, not by invoice. Four rules decide what lands in eligible basis: what a unit of energy property is, which supporting equipment counts as an integral part, how much used equipment a retrofit can carry, and how property serving two purposes is treated. Treasury’s final regulations, released for public inspection December 4, 2024 and published in the Federal Register December 12, set all four.
For a tax-exempt owner claiming the credit as a direct payment, the ownership rule is the one that costs the most, and the regulations use a geothermal fact pattern to show exactly how a campus project loses the credit.
This is Section 48. New solar is generally claimed under Section 48E now, and geothermal heat pump property is the piece of Section 48 that survived. The note near the end has the current picture.
What a unit of energy property is
A unit is all the functionally interdependent components you own that operate together and can operate apart from other energy properties in a larger project. Components are functionally interdependent when placing each one in service depends on placing the others in service.
Rooftop solar gets a specific rule: all components installed on a single rooftop are treated as one unit of energy property.
For six named types of property, geothermal heat pump property, solar process heat, fiber optic solar, electrochromic glass, qualified biogas, and microgrid controllers, the test asks whether the components depend on each other to perform the intended function instead. That’s the change that makes geothermal heat pump systems work under this framework.
Which supporting equipment is in the basis
Property is an integral part if it’s used directly in the intended function of the energy property and is essential to the completeness of that function. You can’t claim the credit on integral property you don’t own.
The regulations get specific, and this paragraph is the one to hand to whoever prepares your cost breakdown. Power conditioning equipment includes transformers, inverters, and converters, along with the switches, circuit breakers, arrestors, and the hardware and software used to monitor, operate, and protect them. Transfer equipment includes wires, cables, and combiner boxes, plus current transformers used for metering and electrical interrupters. Transmission and distribution lines are out, and so is anything beyond the electrical transmission stage.
On the rest: on-site operation and maintenance roads are integral, site access and visitor roads are not. Fences are not. Buildings generally are not, with narrow exceptions for structures that are essentially machinery.
The ownership rule that costs the most
The regulations require a taxpayer to own at least a fractional interest in the entire unit of energy property. Owning separate components isn’t enough, and no credit is determined for component ownership that doesn’t make up a unit.
The regulations illustrate it with geothermal. One party owns the ground loops and a heat pump, which together make a unit, so that party has a credit. Another party owns only heat pumps, which the regulations call merely a component, so that party gets nothing.
Shared campus and district-scale projects are where nonprofits meet this rule. If a hospital, a university, and a city split a system by equipment type rather than by undivided fractional interest, one or more of them can end up holding components and no credit.
The 80/20 rule for retrofits
A retrofitted unit can be treated as newly placed in service if the fair market value of the used components is not more than 20% of the total value of the unit, counting the cost of new components plus the value of used ones. Only the cost of the new components goes into the credit base.
Two details get missed. The test compares fair market value of used property against cost of new property, not cost against cost. And if the test fails, the new costs aren’t partially allowed, they’re disallowed entirely. The regulations include an example where $300,000 of capital improvements to a $1 million unit produces no credit at all.
The rule is applied per unit of energy property, not across a project.
Dual use property and the 50% energy input test
Property that draws energy from a qualifying source and a non-qualifying one qualifies if energy from non-qualifying sources doesn’t exceed 50% of total energy input during an annual measuring period. Basis is then proportionate: 80% qualifying input means 80% of basis.
This replaced the old rule, which the preamble calls the 75 percent cliff. Older articles and older cost studies still describe the 25% limit. That rule still governs property placed in service before January 1, 2023. Nothing placed in service since is measured that way.
Inputs are compared on a Btu basis. The measuring period runs 365 days from the placed in service date, then repeats. If qualifying input drops below half in any later measuring period inside the five year recapture window, recapture applies. A building running a geothermal system alongside an electric boiler has to watch that split every year for five years, not once.
Direct pay and Section 50(b)(3). The regulations point to the rule that denies the credit for property used by tax-exempt organizations, and then to the exception at Section 6417(d)(2) for an applicable entity making an elective payment election. So the old disqualification doesn't apply to an applicable entity that elects direct pay.
Which projects these rules reach
The energy property definitions apply to property placed in service after December 31, 2022, in a tax year beginning after December 12, 2024. For a calendar-year organization, that means tax year 2025 forward. The prevailing wage and energy project rules in the same package use a different formula, applying to projects placed in service in tax years ending on or after December 12, 2024 whose construction begins after that date.
Updated September 2026. Section 48 has narrowed considerably since this was written. Solar property whose construction begins on or after January 1, 2025 no longer gets the 6% tier; it falls to the residual tier, which the 2025 tax law cut from 2% to zero, with no bonus increases, for construction beginning on or after June 16, 2025. Geothermal heat pump property is the exception that survived: it stays eligible for construction beginning before January 1, 2035, and it's still eligible for direct pay. The rate steps down at the end, though. A construction start before January 1, 2033 is in the 6% tier, reaching 30% with prevailing wage and apprenticeship compliance, a 2033 start drops to 5.2%, and a 2034 start to 4.4%. New solar projects are generally claimed under Section 48E instead, where parallel definitions apply, and Section 48E is closing too: a wind or solar facility whose construction begins after July 4, 2026 gets no credit for property placed in service after December 31, 2027.
What to do next
Before the cost breakdown is prepared, settle two things: whether your organization owns an undivided interest in whole units rather than in components, and whether any equipment in the project serves a second, non-qualifying purpose.
Have a shared or campus project? GreenFile Advisory reviews ownership and basis questions for tax-exempt owners before the return is built. Describe the structure and we'll work through where the credit sits.
Have a project and a deadline?
GreenFile Advisory handles the filing side of Section 6417 direct pay: eligibility confirmation, IRS pre-filing registration, and the Form 990-T with the elective pay election. Filing and compliance only, so we are not competing with your installer or your financing.
This article is general information, not tax advice, and it reflects IRS guidance as of December 10, 2024. Deadlines and eligibility depend on your organization's tax year and entity type. Please confirm your own facts with a qualified tax professional before relying on anything here.