Geothermal Energy Tax Incentives for Home and Business

Federal geothermal energy tax incentives for home and business now run on two separate tracks. The 30% residential clean energy credit under Section 25D ended for installations completed after December 31, 2025, cut short by nearly a decade when the One Big Beautiful Bill Act was signed on July 4, 2025.¹ The commercial investment tax credit for business-owned geothermal systems was not terminated and remains available for projects that begin construction through 2034.² If your residential system was finished by the 2025 cutoff, you can still claim the credit and carry any unused portion forward.

Residential Credit for Systems Completed by December 31, 2025

Under Section 25D, an expenditure on an existing home is treated as made when the original installation is completed. A geothermal system still being installed on January 1, 2026, misses the credit entirely. For new construction, the expenditure is treated as made when you first begin using the home, so a system installed during the build of a house you didn’t occupy until 2026 doesn’t qualify either.³

For installations that beat the deadline, the credit is 30% of eligible costs with no dollar cap. A $25,000 installation produces a $7,500 credit. Eligible costs include the heat pump equipment, underground loop piping, drilling or trenching, onsite labor for assembly and installation, and the piping or wiring that connects the system to your home.⁴⁵

The system has to be installed at a dwelling you use as a residence in the United States. Rental properties you don’t personally live in are excluded. If part of the home is used for business, only the personal-residential share of costs qualifies.⁶

Carrying the Credit Forward Into 2026 and Beyond

The residential credit is non-refundable. It can reduce your federal income tax to zero, but it won’t generate a refund on its own. When the credit is bigger than your tax liability, the excess carries forward to the next tax year and continues to carry until it’s fully used.⁶

That carryforward is still available in 2026 and beyond, even though no new residential credits can be earned after 2025. If you can’t use the full amount in the year of installation, file Form 5695 anyway to preserve the carryforward.⁵ A retiree with $4,000 in annual federal income tax and a $7,500 credit would use $4,000 the first year and carry the remaining $3,500 into the next return.

Filing Form 5695

Claim the residential credit on IRS Form 5695, Part I. Total geothermal heat pump costs go on Line 4, including qualified labor and piping.⁵ Keep the manufacturer’s certification statement confirming the equipment meets Energy Star standards, along with itemized receipts that separate qualifying geothermal components from any non-qualifying work performed at the same time. Hold these records indefinitely. The IRS can request verification years later, which is especially relevant when a credit is being carried across multiple returns.

How Rebates and Subsidies Change the Credit

Not every dollar you paid counts toward the 30% math. Public utility subsidies for purchasing or installing the system must be subtracted from your qualified expenses, whether the utility paid you directly or paid your installer.⁷

Manufacturer or installer rebates also reduce qualified costs when the rebate is tied to the equipment price and comes from someone involved in the sale. A $2,000 manufacturer rebate on a $25,000 system leaves you with a credit of 30% of $23,000.

State incentives work differently. Most state rebates do not reduce the federal credit unless they qualify as a purchase-price adjustment under federal tax law, even when they’re labeled “rebates.” The trade-off is that these state payments may be taxable income on your federal return.⁷ Net metering credits for electricity sold back to the grid have no effect on your qualified expenses.

Commercial Investment Tax Credit for Geothermal

Business-owned geothermal projects that begin construction through 2034 remain eligible for the investment tax credit. Projects placed in service on or after January 1, 2025, generally fall under Section 48E, the clean electricity investment credit, while projects that began construction before that date may still claim under Section 48.²

The base credit rate is 6% of the project’s qualified investment.⁸ Projects that satisfy prevailing wage and apprenticeship requirements earn 30%. That five-fold jump makes the labor rules the most consequential decision in commercial geothermal financing. Bonus credits can push the total higher still.

Prevailing Wage and Apprenticeship

Two labor standards apply throughout construction. Every laborer and mechanic on the project, whether employed by you or a contractor, must be paid at least the prevailing wage rate for their trade in the project’s geographic area. That obligation extends through a five-year recapture period after the project is placed in service and covers any alteration or repair work during that window.⁹

At least 15% of total labor hours on the project must also be performed by qualified apprentices from registered apprenticeship programs. The 15% threshold applies to any project where construction begins in 2024 or later.¹⁰ Miss either standard and you drop to the 6% base rate. There is no middle result.

Domestic Content and Energy Community Bonuses

Two bonus credits stack on top of the base or increased rate. Meeting domestic content requirements, which set specified percentages of steel, iron, and manufactured products mined or produced in the United States, adds 10 percentage points for projects that also satisfy prevailing wage and apprenticeship rules, or 2 points for those that don’t. Projects with a maximum net output under one megawatt qualify for the full 10-point bonus regardless of labor compliance.¹¹

A separate 10-percentage-point increase applies to projects located in energy communities: areas tied to fossil fuel industries, including places with significant employment in coal, oil, or natural gas extraction and areas where coal mines or power plants have closed.¹² A project that meets prevailing wage requirements, uses domestic materials, and sits in an energy community can reach a combined credit of 50%.

Direct Pay and Transferability

Tax-exempt organizations, tribal governments, and public power entities can use the direct pay option to receive the credit’s cash value as a refund even though they owe no federal income tax. For projects placed in service from 2023 through 2032, eligible entities file a return and receive a payment equal to the credit amount.¹³

Taxable businesses that earn more credit than they can use may transfer the credit to an unrelated taxpayer for cash. The transfer payment is not taxable income to the seller and not deductible by the buyer, which keeps the transaction clean and gives smaller developers a way to monetize credits that would otherwise take years to absorb.

Equipment Must Meet Energy Star Standards

Both credits require the geothermal system to meet the Energy Star efficiency standards in effect when the expenditure is made. For the residential credit, that means the standards in effect when installation is completed.⁴ Version 3.2 of the Energy Star specification sets minimum EER (cooling) and COP (heating) benchmarks that vary by loop configuration, with the strictest requirements for open-loop water-to-air systems.¹⁴

The system must use the ground or ground water as its thermal source for heating and its thermal sink for cooling. Air-source heat pumps do not qualify even when marketed as heat pumps. Before you buy, confirm the manufacturer has a certification statement for the specific model number showing it meets the applicable Energy Star tier.

Qualifying and Non-Qualifying Costs

The line between eligible and ineligible costs is where most claim errors happen. Qualifying expenses include the heat pump unit, underground loop field piping, heat exchangers, drilling and trenching for the loops, and labor directly tied to assembling and installing the geothermal system. Wiring or piping that connects the equipment to the home qualifies too.⁴

Everything downstream of the geothermal unit is excluded. Ductwork, radiant floor distribution, backup electric strip heaters, and thermostats are not part of the geothermal exchange and do not qualify. Landscaping or driveway repair after loop installation also does not qualify. Ask your installer for a line-item quote that separates qualifying geothermal components from distribution and finishing work. You will need that separation at tax time.

Filing the Commercial Credit

Businesses claim the geothermal investment tax credit on IRS Form 3468. The form identifies the energy property type, reports qualified investment costs, and calculates the applicable credit percentage based on whether prevailing wage and apprenticeship standards were met.⁹ If you’re claiming the domestic content bonus, attach a domestic content certification statement.¹¹

The credit is claimed for the tax year in which the system is placed in service, meaning the year it’s ready and available for use in your business, not when construction started or when payments were made. Given how base credits, labor bonuses, domestic content bonuses, and energy community bonuses stack, having a tax professional review the return before filing is time well spent. Getting the prevailing wage documentation wrong triggers recapture of the bonus amount plus penalties, and that problem usually surfaces during audit years later rather than at filing.

1
United States Congress. Public Law 119-21 – One Big Beautiful Bill Act
2
Internal Revenue Service. Tax-Exempt Entities and the Investment Tax Credit (Section 48 and Section 48E)
3
Internal Revenue Service. FAQs for Modification of Sections 25C, 25D, 25E, 30C, 30D, 45L, 45W, and 179D Under Public Law 119-21
4
Office of the Law Revision Counsel. 26 USC 25D – Residential Clean Energy Credit
5
Internal Revenue Service. Instructions for Form 5695
6
Office of the Law Revision Counsel. 26 US Code 25D – Residential Clean Energy Credit
7
Internal Revenue Service. Residential Clean Energy Credit
8
Office of the Law Revision Counsel. 26 USC 48 – Energy Credit
9
Internal Revenue Service. Instructions for Form 3468
10
Internal Revenue Service. Frequently Asked Questions About the Prevailing Wage and Apprenticeship Under the Inflation Reduction Act
11
Internal Revenue Service. Domestic Content Bonus Credit
12
Office of the Law Revision Counsel. 26 US Code 48 – Energy Credit
13
Environmental Protection Agency. Summary of Inflation Reduction Act Provisions Related to Renewable Energy
14
ENERGY STAR. ENERGY STAR Program Requirements for Geothermal Heat Pumps – Eligibility Criteria Version 3.2