Geothermal Heat Pump Tax Credits: How Nonprofits Get Paid

A school district, church, or municipality that installs a geothermal heat pump system can claim the federal Investment Tax Credit and receive it as cash from the IRS. The credit runs from 4.4% to as much as 50% of eligible cost depending on rate, timing and adders, the election is made on Form 990-T, and the window stays open for projects that begin construction before January 1, 2035.

That last date is the reason this article exists. The 2025 tax law compressed solar and wind hard. It left the geothermal heat pump credit in Section 48 alone, though it did change two things around it, covered below.

Why a geothermal heat pump is Section 48 property, not Section 48E

Two different technologies get called geothermal, and they land in two different places in the Code.

Geothermal power plants pull heat from deep reservoirs to spin a turbine and make electricity. Those are Section 48E clean electricity property.

Geothermal heat pumps generate no electricity at all. They use the stable temperature of the ground as a heat source in winter and a heat sink in summer. Because Section 48E requires a facility “used for the generation of electricity,” a heat pump cannot qualify there. It stays in Section 48, under the clause covering equipment that uses the ground or ground water to heat or cool a structure.

Most institutional installations are heat pumps. Campus loops, school HVAC replacements, municipal buildings, and hospital plants are almost always Section 48 property.

What the 2025 law did to geothermal, which is almost nothing

The One Big Beautiful Bill Act made exactly two changes to Section 48. It zeroed out a residual catch-all category for construction beginning on or after June 16, 2025, and it switched off the bonus adders for that zeroed category. Geothermal heat pump property sits in a different clause and neither change reaches it. No new placed-in-service deadline. No termination date moved.

Two things did change outside Section 48, and they matter to different readers. The same law added Section 50(e), which provides that for purposes of Section 50 and Section 168, ownership of heat pump property is determined without regard to whether the property is readily usable by a person other than the lessee or service recipient, effective for taxable years beginning after July 4, 2025. That one is favorable. It also struck the subclause giving Section 48 energy property five year MACRS, for construction beginning after December 31, 2024. A nonprofit or municipality with no depreciation to take is unaffected. A taxable partner, or a buyer in a Section 6418 transfer, is not, and should price it in.

The foreign entity restrictions added by the same law are defined in Section 7701(a)(51) and (52) and operate through Sections 45X, 45Y, 48E and 50(a)(4). None of them reach Section 48 geothermal heat pump property, and this is firmer than a planning position: the operative terms do not appear in Section 48 at all, and every enforcement provision built around the regime is keyed by cross-reference to that same short list of credits. We walked through the full perimeter, including the six year assessment period and the supplier penalty, in whether the foreign entity rules apply to geothermal.

Notice 2025-42, which tightened the beginning-of-construction rules, applied only to wind and solar facilities under Sections 45Y and 48E, and a federal court vacated it in full, universally rather than as to the plaintiffs only, in Oregon Environmental Council v. Internal Revenue Service, No. 25-4400 (CKK) (D.D.C. June 6, 2026). Either way it never touched geothermal. Heat pumps are governed by Notice 2018-59, the Section 48 beginning-of-construction notice, and still use the physical work test and the 5% safe harbor.

How much the credit is worth

The base rate is 6%. A five-times multiplier takes it to 30% if the project either meets prevailing wage and apprenticeship requirements or falls under the one megawatt threshold.

Two adders sit on top of that, for domestic content and for location in an energy community. Each is 10 percentage points for a project that meets prevailing wage and apprenticeship or falls under the one megawatt exception, and 2 percentage points for a project that meets neither. Stacked at the higher rate, the ceiling is 50%. Form 3468 carries both figures, at Part VI lines 15d and 15f.

The rate steps down late in the decade based on when construction begins:

Construction begins	Base	With the multiplier
Before January 1, 2033	6%	30%
During 2033	5.2%	26%
During 2034	4.4%	22%
January 1, 2035 or later	Not eligible	Not eligible

Published commentary quotes both sets of numbers, which causes confusion. Both are right. One is the statutory energy percentage and one is the rate after the multiplier. Ask which one a source means before you budget against it.

The 284-ton question

The one megawatt exception is the single most consequential number on a geothermal project, because clearing it means 30% with no prevailing wage compliance at all.

A heat pump produces no megawatts, so the threshold has to be converted. Treasury Regulation Section 1.48-13(e)(5) does this precisely, and almost nobody cites it: one megawatt equals 3.4 million Btu per hour of heating, or 284 tons of cooling. The rule names GHP property by name. Two details decide close cases: output is the greater of the rate of heating or the rate of cooling, not whichever number the owner prefers, and redundant equipment not operated at maximum output in normal operation is excluded.

A single-building school or church system usually sits well under that line and qualifies automatically. A campus loop, a district energy system, or a large consolidated K-12 project usually does not, and the owner must run full prevailing wage and apprenticeship compliance through construction and for five years after the system is placed in service.

One more thing decides this, and it catches people. The 284-ton test is not applied building by building. Treasury Regulation Section 1.48-13(d)(1) treats separate energy properties as one energy project when any four of seven factors are present, among them contiguous land, a single master construction contract, a common permit set, and financing under the same loan agreement. A municipal program procured under one contract, one permit set and one bond authorization trips four without trying. Two buildings that each sit under 284 tons can be one project that does not.

That is a design-phase question, not a tax-season question. Find out which side of 284 tons the project lands on before the equipment is specified.

The tax-exempt bond haircut

This one costs real money and it appears in none of the published geothermal articles reviewed for this piece.

Section 48 borrows a rule from Section 45 that reduces the credit when a project is financed with tax-exempt bond proceeds. The reduction is the lesser of 15% or the proportion of the project financed with those proceeds.

School districts and municipalities are the most likely owners of a large geothermal conversion and the most likely to bond-finance it. On a $20 million project at 30%, a full 15% reduction is roughly $900,000 of credit that quietly does not arrive.

The rule is not a reason to avoid bond financing. It is a reason to model the credit net of the reduction before the board approves a budget that assumes the gross number.

The low-income bonus does not apply, and readers coming from solar will assume it does

The Low-Income Communities Bonus Credit adds 10 or 20 percentage points, depending on category, to qualifying projects under Section 48E(h). It does not reach geothermal heat pumps.

Section 48E(h) operates on an “applicable facility,” which is a subset of a Section 48E “qualified facility,” and a qualified facility has to be “used for the generation of electricity” under Section 48E(b)(3)(A)(i). A heat pump generates no electricity, so it is not a qualified facility, and nothing built on that definition can reach it. The section of Form 3468 covering geothermal heat pump systems contains no low-income bonus lines at all, unlike the solar section.

Most articles simply omit this, which a reader familiar with solar will read as availability.

The filing sequence

Most exempt organizations file Form 990-T by the 15th day of the 5th month after year end, extended six months on Form 8868. Section 401(a) trusts and IRAs use the 4th month instead, which is where the widely repeated April 15 date comes from. It is the wrong date for a typical nonprofit.

School districts and municipalities on a June 30 fiscal year should note that their original deadline is November 15 and their extended deadline is May 15, which inverts the calendar most published guidance assumes.

The deadline rule that has no fix

The election must be made on an original, timely filed return, including extensions.

It cannot be made for the first time on an amended return. It cannot be added later through an administrative adjustment request. And the discretionary late-election relief that practitioners reach for in other contexts is expressly unavailable here. Treasury Regulation Section 301.9100-2(b) provides a six-month automatic corrective window, but only for a taxpayer that “has not received an extension of time to file a return.” An applicable entity with no filing requirement is deemed to have the automatic six-month extension, so on the better reading that window is closed to it and no 9100 relief of any kind is available. No published guidance addresses the interaction. Plan against the conservative reading: for these entities the 15th day of the eleventh month after year end is a hard wall.

A numerical error can be corrected afterward. A missing election cannot. That is the difference between a fixable mistake and a permanently lost credit, and it is absent from every geothermal article surveyed for this piece.

One more filing note. Under Treasury Regulation Section 1.6417-2(b)(3)(i) an entity with no federal filing requirement is deemed to have an automatic paperless six-month extension, which “does not require any action, request or filing by the entity.” Form 8868 is the extension route for an entity that already has a filing requirement, such as a Section 501(c)(3) that files Form 990. An entity unsure which side of that line it sits on should file the 8868, since filing one costs nothing and relying on a deemed extension that does not apply costs the election.

Form line references reflect the 2025 revision of Form 3468.

This article is general information, not tax advice, and it reflects IRS guidance as of September 4, 2026. 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.