Commercial Geothermal Tax Credits in 2026: What the §48 ITC Still Offers Building Owners

The residential geothermal tax credit ended after 2025. Coverage of it compresses to one sentence: "the geothermal tax credit expired." If you are evaluating a geothermal heat pump project for a commercial building, that sentence points at a different section of the tax code than the one governing your project.

The credit that ended is the residential credit under Section 25D of the Internal Revenue Code. Commercial geothermal heat pump property falls under the Section 48 Investment Tax Credit, the ITC, a credit against federal income tax for investments in qualifying energy property. It was not terminated by the law that ended the residential credit. The Department of Energy continues to publish it as a current incentive for commercial building owners installing geothermal heat pumps. The same law did, however, quietly change the depreciation treatment of that property, and it changed the residential credit using a date test that is easy to state imprecisely. Together those changes move both the credit value and the depreciation schedule on a commercial project.

The practical questions for a commercial project are which credit applies, what rate it can earn, how depreciation changed, and whether transferability or elective pay can make the credit usable by an entity without tax appetite. If you are still scoping the system itself, start with our guide to geothermal systems for commercial buildings and come back here for the money.

This article describes federal statute, IRS form instructions, and agency guidance as of August 2026. It is general information, not tax advice. Whether and how any of it applies to your project depends on facts specific to your entity, site, and timeline — engage a qualified tax professional who works on energy credits before relying on any figure here.

Three Credits Share One Name

"Geothermal tax credit" is not one thing. Federal law contains at least three distinct incentives that get compressed into that phrase, and they have different rules, different rates, and different end dates:

1. The residential credit, §25D. This is the credit homeowners claimed for ground-source heat pumps at their houses. It has been terminated. The termination turns on when an expenditure is treated as made, which is not the same thing as when equipment was bought or paid for.

2. The commercial ITC, §48, as applied to geothermal heat pumps. This is the credit for geothermal heat pump property installed in commercial buildings — offices, schools, churches, multifamily developments, agricultural operations, nonprofit facilities. It is the subject of this article, and it was not terminated.

3. Credits for geothermal electricity generation. These apply to a different technology entirely: power plants that generate electricity from geothermal resources. More than one credit lives here, and they are not interchangeable — §45 is the legacy production credit, §45Y the clean-electricity production credit that governs qualifying facilities in the post-2024 regime, and §48E the clean-electricity investment credit. Public Law 119-21 legislates on §45Y directly. They are governed by their own rules and their own expiry dates, none of which are covered here. If you see a date or a percentage attached to "geothermal" in coverage of utility-scale power, it belongs to this category and tells you nothing about a heat pump project.

Nearly every error in general coverage of this topic comes from letting a fact about one of these three migrate to another. For the residential credit's full history, see our federal geothermal tax credit guide. From here on, this article is about category two.

What Actually Ended: The Residential §25D Credit

Public Law 119-21 — the One Big Beautiful Bill Act — was enacted on July 4, 2025. Section 70506 of that law, titled "Termination of Residential Clean Energy Credit," amends §25D by striking the phrase "to property placed in service after December 31, 2034" and inserting "with respect to any expenditures made after December 31, 2025."

That one sentence made two changes at once, and the second is the one that gets lost. The termination date moved up, and the test changed. The old sunset was a placed-in-service test — keyed to when the completed system was ready and available for use. The new termination is an expenditures-made test: the residential credit does not apply to any expenditures made after December 31, 2025. "Made," here, is a defined term rather than a plain-English one, and it is the detail most coverage drops. §25D(e)(8) supplies the rule: an expenditure is generally treated as made when the original installation is completed, not when the invoice was paid — and where the property is installed in connection with construction or reconstruction of a structure, when the taxpayer first uses the structure. So the controlling question is not the date on the cheque.

The practical upshot for readers of this article is simpler: the residential credit is not available for expenditures made after December 31, 2025, and nothing about that termination touches a commercial project. When a contractor, lender, or board member says "the geothermal credit is gone," this is the credit they mean. Our geothermal tax credit 2026 update tracks the aftermath of that change as it develops.

The Commercial §48 ITC Was Not Terminated

Geothermal heat pump property has its own line in the §48 energy-property definitions: §48(a)(3)(A)(vii). Public Law 119-21 — the same statute that terminated the residential credit — contains no provision terminating that category.

The Act does add one provision that names geothermal heat pumps. Section 70512(c)(2) adds a new §50(e), titled "Rules for Geothermal Heat Pumps," which reads:

"For purposes of this section and section 168, the ownership of energy property described in section 48(a)(3)(A)(vii) shall be determined without regard to whether such property is readily usable by a person other than the lessee or service recipient."

That is an ownership-determination rule for leased and service-contract arrangements — a technical adjustment to who is treated as owning the property. Read it precisely: it operates "for purposes of this section and section 168," where "this section" is §50 (recapture and special rules), not §48. So it governs ownership for §50 purposes and for depreciation under §168; it is not itself a statement that the §48 credit survives, and we do not offer it as one.

What does establish that the commercial category survives is §48 itself. The current statute still defines geothermal heat pump property at §48(a)(3)(A)(vii), and §48(a)(7) still assigns it a rate for construction beginning before January 1, 2035. The law that ended the residential credit left that category standing.

That statutory picture is matched by current agency guidance. As of August 2026, the Department of Energy's page on tax credits for geothermal heat pumps states: "Commercial building owners interested in installing GHPs are eligible for tax credits under the Investment Tax Credit (ITC, Section 48)." The same page acknowledges the new law — "The One Big Beautiful Bill Act (P.L. 119-21), enacted on July 4, 2025, contains several provisions on energy tax credits" — and still publishes the §48 schedule as live.

The Rate Structure: 6% Base, 30% With Labor Rules

The rate structure below is drawn from the IRS Instructions for Form 3468 (2025) — Form 3468 being the form on which the ITC is claimed — and from DOE's published schedule.

The base rate is 6%. The IRS instructions describe a 6% credit rate for energy property where the increased-credit requirements are not met.

Meeting the labor rules multiplies it by five, to 30%. Projects that satisfy the prevailing wage and registered apprenticeship requirements — commonly abbreviated PWA — receive five times the base rate, which produces 30%.

The IRS instructions describe two exceptions under which a project gets the increased rate without satisfying the PWA requirements:

• Construction began before January 29, 2023. This is a construction-begins test — it keys to when construction started, not when the system is finished or paid for.
• The project is small: less than 1 megawatt of electrical or thermal output. Note that the threshold is stated in electrical or thermal terms.

For projects that do need to satisfy the apprenticeship requirements, the IRS instructions describe three components, and a project has to clear all three:

• A labor-hours requirement — 10% to 15% of total labor hours performed by qualified apprentices, with the percentage depending on when construction began (again a construction-begins test).
• A ratio requirement — the applicable apprentice-to-journeyworker ratio of the registered apprenticeship program must be satisfied for each day apprentices are employed.
• A participation requirement — a taxpayer, contractor, or subcontractor employing at least four workers on the project must employ at least one qualified apprentice.

The base rate steps down in the 2030s, on a construction-begins test. DOE's published schedule has the base credit at 6%, "scaling to 5.2% in 2033 and 4.4% in 2034," and states no date test for those years. The statute does. §48(a)(7) assigns the geothermal heat pump rate by when construction begins: 6% for property whose construction begins before January 1, 2033 (and which is placed in service after December 31, 2021), 5.2% for construction beginning after December 31, 2032 and before January 1, 2034, and 4.4% for construction beginning after December 31, 2033 and before January 1, 2035. If your project is timed anywhere near one of those boundaries, the date that matters is when construction starts — and that is a determination worth making with your tax professional rather than from a summary table.

One framing note on the ceiling. DOE's page does put a number on it: businesses are eligible for "'bonus credits' of up to 30% total" when projects meet prevailing wage, domestic content, or energy community requirements. That figure bundles all three together. The IRS instructions build the rate differently: a 6% base multiplied to 30% by PWA compliance, plus separate domestic-content and energy-community adders, covered next. Because those two framings do not reconcile cleanly, no single combined maximum is published here. The rate your project reaches is the product of which requirements it genuinely meets.

Domestic Content and Energy Community Adders

On top of the base-or-30% structure, the IRS instructions describe two adders, each expressed in percentage points added to the credit rate.

Domestic content. Projects meeting domestic-content requirements add 2 percentage points at the base rate, or 10 percentage points if the project also qualifies for the increased PWA rate. Claiming it requires a certification attached to Form 3468.

Energy community. Projects located in an "energy community" likewise add 2 percentage points at the base rate or 10 points at the increased rate. This adder is tested where and when the project is placed in service — placed in service being the tax milestone at which the completed property is ready and available for its intended use, and the year in which the credit is claimed. Location on the day you sign contracts is not the test; location at placed-in-service is. The IRS instructions describe three qualifying categories:

• a brownfield site;
• a statistical area that meets a fossil-fuel employment threshold (0.17% or greater) or a local fossil-fuel tax revenue threshold (25% or greater), plus an unemployment-rate test; or
• a census tract, or a tract adjoining one, where a coal mine closed after 1999 or a coal-fired generating unit was retired after 2009.

That third category covers more ground than most owners expect — worth a real determination by your tax professional for any project in a historically coal-adjacent region.

How the Depreciation Rules Changed

Here is the provision of Public Law 119-21 most likely to blindside a commercial geothermal pro forma, because it changes a number owners and lenders have penciled in for years.

Commercial energy property classified under §48 historically qualified for 5-year cost recovery under MACRS — the Modified Accelerated Cost Recovery System, the federal depreciation schedule that determines how quickly you write off the asset. That rapid write-off was a large share of the after-tax case for commercial geothermal.

Section 70509 of the Act, titled "Termination of Cost Recovery for Energy Property," amends §168(e)(3)(B)(vi) to remove that classification. Its effective-date language is explicit: the amendment applies "to property the construction of which begins after December 31, 2024." That is a construction-begins test — a different date and a different test than the residential termination. The 5-year MACRS route that ran through the §48 energy-property classification is gone for property whose construction begins after December 31, 2024.

What replaces it is the most important open question in this article, and the honest answer is: none of the primary sources this article relies on states a replacement recovery period, and we will not guess at one. What the statute establishes is narrow: the special five-year classification at §168(e)(3)(B)(vi)(I) was struck for property whose construction begins after December 31, 2024. It does not follow that no recovery period applies — general §168 asset-classification rules still do — only that the shortcut is gone and the answer now depends on your project. The recovery period for a post-2024 project depends on how the components of the system are classified — building structural components versus separate equipment versus land improvements — and that classification is precisely the analysis a qualified tax professional who works on energy credits performs against your project's actual scope. Any specific replacement period you see quoted without that analysis behind it should be treated as unverified.

Two related rules from the IRS instructions still frame the depreciation math, whatever the recovery period turns out to be:

• Basis reduction. Depreciable basis — the amount you recover through depreciation — must be reduced by 50% of the credit determined. A 30% credit therefore reduces basis by 15% of eligible basis. The credit and full depreciation do not stack dollar-for-dollar.
• Ownership for depreciation. The §70512(c)(2) ownership rule quoted earlier applies "for purposes of this section and section 168" — that is, it reaches depreciation as well as the credit in lease and service-contract structures.

Selling the Credit or Taking It as Cash

A tax credit is only worth something to an entity that can use it. Two mechanisms address the common cases where the project owner cannot.

Transferability, §6418. The IRS instructions describe that an eligible taxpayer may transfer all or part of a §48 credit to an unrelated third party in exchange for cash — useful when the owner's tax liability is smaller than the credit. One boundary to hold onto: the transfer conveys the credit only. Ownership of the property and its depreciation deductions stay with the owner.

Elective pay, §6417. Elective pay — often called "direct pay" — lets certain "applicable entities" that ordinarily cannot use income-tax credits elect to treat the §48 credit as a payment of federal income tax. For an entity with no tax liability, that payment can create a refundable overpayment — the credit arrives as cash rather than as a reduction of taxes it doesn't owe. Pre-filing registration with the IRS is required.

Two categories of applicable entity are confirmed in the IRS guidance this article draws on: tax-exempt entities and governmental entities. The complete statutory list is broader than those two, but its full contents are not verifiable from the sources this article relies on, so it is not enumerated here — if your organization is anything other than a straightforward taxable business, have your tax professional check the full §6417 list before assuming either way.

One condition attaches specifically to elective-pay users: a domestic-content-related reduction can apply to applicable entities using elective pay for projects at or above 1 megawatt. Exceptions exist where meeting domestic-content requirements would increase construction costs by more than 25%, or where qualifying domestic products are not available in sufficient quantity or quality. If you are a school district or municipality planning a large system, this interaction belongs on the diligence list early, while procurement can still respond to it.

How these mechanisms fit into a full capital stack — alongside loans, leases, and third-party structures — is covered in our geothermal financing guide for commercial projects.

USDA REAP for Rural and Agricultural Projects

For agricultural producers and rural small businesses, the federal picture includes a second program that is not a tax credit at all: the USDA's Rural Energy for America Program (REAP), which provides grants and guaranteed loans. DOE's geothermal heat pump page specifically directs agricultural producers and rural small businesses to consider it.

Per USDA Rural Development's program page (retrieved August 18, 2026):

• Grants are capped by project. USDA limits the federal share to 50% of total eligible project cost only for projects meeting at least one of its listed conditions; all other projects are limited to 25%. Since geothermal heat pumps are not established as categorically qualifying REAP renewable-energy systems, do not assume the 50% tier.
• Guaranteed loans can cover up to 75% of total eligible project cost, and a combined grant and guaranteed loan can also reach up to 75%.
• Eligibility runs to agricultural producers — generally those deriving at least 50% of gross income from agricultural operations — and rural small businesses, with "rural" generally meaning areas with populations of 50,000 or less. Agricultural producers may site a project outside a rural area when it is associated with an on-site agricultural production operation.

Three cautions before REAP enters a pro forma:

First, the fit of a geothermal heat pump project is "may," not "does." The USDA page does not use the words "geothermal heat pump" or "ground-source heat pump" anywhere. Its eligible-use categories include "geothermal for electric generation or direct use" and "high-efficiency HVAC systems." A commercial geothermal heat pump project may fit those categories — but blanket categorical eligibility is not something the page establishes, and we will not claim it. Whether your project fits is a determination to make with the program office.

Second, the loan-guarantee percentage is only published through FY2025. The USDA page states an 80% loan guarantee for fiscal year 2025 only. The FY2026 percentage is not published there, and we could not verify it — do not assume 80% carries forward.

Third, application windows open and close. As of the August 18, 2026 retrieval, grant applications were not being accepted, while guaranteed-loan applications could be submitted. That is a point-in-time status that changes with USDA notices. For REAP, the right door to knock on is your USDA Rural Development state office — REAP is administered through the state offices, and they hold the current answer on windows, percentages, and whether your project fits.

Key Dates and the Test Each One Belongs To

Federal energy-credit dates come attached to one of three tests: when expenditures were made, when construction begins, or when the property is placed in service. A date quoted without its test is not information — the most common error in coverage of these credits is porting a date from one test onto another. Every date used above, with its test:

What to Do Next

1. Read every "geothermal tax credit expired" headline as being about §25D unless it names §48. The residential termination (expenditures made after December 31, 2025) says nothing about your commercial project.
2. Get the depreciation classification done professionally. The statutory 5-year MACRS shortcut is gone for construction beginning after December 31, 2024, and the cited statute and agency guidance do not specify a replacement recovery period — so it now falls out of how your system's components classify under the general rules. That is analysis worth budgeting for rather than assuming.
3. Build the rate up from the rules that actually apply. Start at 6%, establish whether PWA compliance (or the under-1-MW or pre-January 29, 2023 construction-begins exceptions) gets you to 30%, then evaluate each adder on its own terms — including the placed-in-service location test for energy communities.
4. If you are tax-exempt or governmental, start the elective-pay work early. Pre-filing registration is required, the full applicable-entity list is broader than the two confirmed categories, and the domestic-content reduction for projects at or above 1 MW can shape procurement.
5. If you are rural or agricultural, call your USDA Rural Development state office about current REAP windows before assuming grant money is on the table — as of August 18, 2026, grant applications were not being accepted and guaranteed-loan applications were.