The Inflation Reduction Act (IRA) of 2022 introduced major updates to existing clean energy tax credit incentives. Section 48 of the Internal Revenue Code (Code) provides investment tax credits (ITCs) for qualified energy property, including geothermal heat pumps (GHPs). Tax-exempt entities, as well as state, local, and tribal governments remain eligible for direct payment of the ITC. For-profit entities that meet certain requirements under the Code can also transfer or sell their ITCs to other taxpayers with available tax capacity. The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, enacted certain changes in respect of the ITCs available with respect to GHPs.
30% bonus rate
The ITC provides a 6% base credit, which can increase to 30% if specific requirements are met. Geothermal projects under 1 MW (approximately 284 tons) automatically qualify for the full 30% credit. Projects exceeding 1 MW must satisfy prevailing wage and apprenticeship requirements to receive the 30% rate; otherwise, they are limited to the 6% base credit.
10% bonus rate for domestic content
The domestic content bonus credit increases the available ITC by increasing the percentage of the credit amount by either 10% (if the geothermal project is under 1 MW or if the prevailing wage and apprenticeship requirements are met) or 2% (if the geothermal project is over 1 MW and the prevailing wage and apprenticeship requirements are not met.
Leasing of Geothermal Systems
Section 70513 of the OBBBA provides for a determination of the ownership of GHP property without regard to whether it is readily usable by a person other than the lessee or service recipient. Although the IRS has not yet published interpretative guidance with respect to this provision of the OBBBA, this change will likely expand GHP ownership and financing flexibility within the market. Please consult tax professionals for individualized guidance on this subject.
Ten Percent Credit for Energy Communities
The Energy Community bonus tax credit is for clean energy development in communities that have been sites of legacy energy production. The Energy Community bonus tax credit is 10% for projects less than 1MW. The bonus credit is 2% for larger projects unless the apprenticeship and prevailing wage requirements are met. The credit also applies to tax-exempt entities, state, local and tribal governments.
Accelerated Depreciation of Energy Property
Section 70509 of the OBBBA eliminates five-year cost recovery for geothermal heating and cooling systems. Previously, commercial geothermal systems qualified for five-year accelerated depreciation.
The OBBBA also makes 100% bonus expensing permanent for eligible property placed in service beginning in the first taxable year ending after January 19, 2025.
Tax Deduction for Energy-Efficient Commercial Building Property
This energy-efficient commercial building tax deduction applies to new and existing buildings that have been completed since Jan. 1, 2006. The buildings must meet certain American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) efficiency standards to qualify. It allows for a tax deduction in the year the property is placed in service. The deduction can be up to $5.81 per square foot for projects meeting prevailing wage and apprenticeship labor requirements with the amount depending on reduction of total annual energy and power costs for the building. With for-profit businesses, the deduction can be taken by the building owner. The deduction includes buildings owned by not-for- profits, instrumentalities, and Indian Tribal Governments. For not-for-profit organizations, the deduction can be taken by the designers of these buildings.
Section 70507 of the OBBBA terminates the energy efficient commercial buildings tax deduction for projects that begin construction after June 30, 2026.
Equipment that uses the ground or ground water as an energy source for heating and cooling a building is eligible for the Code Section 48(a) tax credit. The system must be in the United States and the tax incentives can benefit for-profit or not-for- profit organizations. After equipment is installed, the taxpayer must take legal title of the equipment and have all necessary licenses and permits needed for its operation.
Use IRS Form 3468 to claim the ITC. The Section 48 tax credit can be used to offset both regular income taxes and alternative minimum taxes (AMT). If the tax credit exceeds the income tax liability, the loss can be carried back 3 taxable years and the remaining balance can be carried into future years.
Commercial building owners can take the energy efficient commercial buildings tax deduction for building projects completed since Jan 1, 2006 and which have begun construction by June 30, 2026. A standard form for this deduction will be available within IRS Form 7205 and to claim this deduction, use the “Other” deduction line on such form. IRS Form 3115 is used for catch-up on all prior year unclaimed energy-efficient commercial building tax deductions. Designers of government projects must amend prior year returns and can only adjust the prior 3 years.
Please consult tax professionals for individualized guidance on this subject.
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