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 6% to as much as 50% of eligible cost, 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 did not touch geothermal heat pumps.

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 move 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 nothing

The One Big Beautiful Bill Act made exactly one change to Section 48: it zeroed out a residual catch-all category for construction beginning on or after June 16, 2025. Geothermal heat pump property sits in a different clause and was untouched. No new placed-in-service deadline. No termination date moved.

The foreign entity restrictions added by the same law operate through cross-references in Sections 45Y, 48E, and 50(a)(4). None of those reach Section 48 geothermal heat pump property. The IRS has not published anything affirmatively confirming this, so treat it as a reading of the statute rather than settled guidance.

Notice 2025-42, which tightened the beginning-of-construction rules, applies only to wind and solar facilities under Sections 45Y and 48E. Geothermal heat pumps still use the older physical work and 5% safe harbor framework.

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, 10 percentage points each, for domestic content and for location in an energy community. Stacked, the ceiling is 50%.

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. The regulations do this precisely, and almost nobody cites them: one megawatt equals 3.4 million Btu per hour of heating, or 284 tons of cooling.

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.

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 to qualifying solar and wind projects. It does not reach geothermal heat pumps.

The provision is limited to a facility that “generates electricity solely from” solar, wind, or small wind property. A heat pump generates no electricity, so it falls outside the definition. 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. A narrow six-month corrective path exists for an entity that filed on time and takes action quickly, but that is the whole of it.

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 worth confirming each year: the regulations describe an automatic paperless six-month extension for government entities, while current IRS operational guidance directs those entities to file Form 8868 for tax years beginning in 2024 and later. The two do not agree. File the 8868.

Current as of September 2026. Form line references reflect the 2025 revision of Form 3468. This is general information, not advice for a specific project.

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.