Geothermal Heat Pumps and Federal Tax Credits: What Building Owners and Architects Need to Know

Who this is for: Building owners, architects, and developers considering geothermal heat pump systems — particularly for luxury residential, commercial, or institutional projects in Utah, Colorado, Arizona, Montana, or Wyoming.

Summary: Federal tax credits under the Inflation Reduction Act now cover 6–30% of geothermal heat pump installation costs. Tax-exempt entities like municipalities and schools can receive equivalent cash through the direct pay option. This post explains how the credits work and how to position your project to capture them.

If you've been on the fence about geothermal heat pump systems, the federal tax incentives currently available under the Inflation Reduction Act (IRA) may be the tipping point. For private building owners, the credits can cover a substantial portion of installation costs. For public entities — municipalities, school districts, nonprofits — a relatively new "direct pay" provision means you can now access these incentives even if you don't owe federal income taxes.

Here's what you need to know.

What Is a Geothermal Heat Pump System?

A geothermal heat pump (also called a ground-source heat pump) uses the stable temperature of the earth — typically between 40°F and 70°F depending on location — to heat and cool buildings with remarkable efficiency. Rather than generating heat by burning fuel or converting electricity, the system simply moves heat to or from the ground. This makes it one of the most energy-efficient HVAC technologies available, capable of delivering three to five units of energy for every one unit of electricity consumed.

Systems can be configured as closed-loop (fluid circulates through buried pipes) or open-loop (groundwater is drawn and returned). Both configurations qualify for the federal credits described below.

Geothermal systems are particularly well-suited for luxury residential and commercial projects in the Mountain West — including Utah, Colorado, Montana, Wyoming, and Arizona — where ground temperatures remain stable year-round and energy loads are high. Axiom Engineering Group has designed geothermal systems for luxury projects across these regions, integrating them fully with structural, electrical, and plumbing systems as part of our complete SMEP engineering approach.

The Commercial Investment Tax Credit (Section 48 / 48E)

For commercial building owners, the primary incentive is the federal Investment Tax Credit (ITC) under IRC Sections 48 and 48E of the Internal Revenue Code, as expanded by the IRA.

Base credit: 6% of qualified project costs.

Enhanced credit: Up to 30%, provided the project meets Prevailing Wage and Apprenticeship (PWA) requirements — meaning workers are paid federally established prevailing wages and a minimum percentage of labor hours are performed by registered apprentices.

In addition to the base and enhanced rates, two bonus adders can increase the credit further:

•       Energy Community Bonus: An additional credit percentage for projects located in designated energy communities — areas historically dependent on fossil fuel industries or with elevated unemployment.

•       Domestic Content Bonus: An additional credit for projects where steel, iron, and manufactured components meet U.S. content requirements.

These can stack, potentially pushing the effective credit well above 30% for qualifying projects in eligible locations.

How to claim it: File IRS Form 3468 (Investment Credit) with your tax return. For projects claiming the enhanced (30%) credit, you must also file Form 7220 (Prevailing Wage and Apprenticeship Verification). Work with a tax professional experienced in energy credits.

Sources: IRS Instructions for Form 3468 (2025), https://www.irs.gov/instructions/i3468; IRS About Form 3468, https://www.irs.gov/forms-pubs/about-form-3468

The Residential Energy Credit (Section 25D)

For residential applications — including single-family homes and secondary residences — geothermal heat pump systems qualify for a 30% tax credit under IRC Section 25D. This covers equipment costs, labor for installation, and piping or wiring to connect the system.

Important deadline: As of current IRS guidance, this residential credit cannot be claimed for expenditures made after December 31, 2025. If you are an architect or owner working on a residential project, time is a factor.

How to claim it: File IRS Form 5695 (Residential Energy Credits) with your personal tax return.

Sources: IRS Instructions for Form 5695 (2025), https://www.irs.gov/instructions/i5695; IRS Fact Sheet 2025-05

Public and Tax-Exempt Buildings: The Elective Pay (Direct Pay) Option

One of the most significant changes under the IRA was extending these incentives to entities that don't pay federal income taxes. Under IRC Section 6417, tax-exempt organizations, municipalities, school districts, and other governmental entities can elect to treat the commercial investment tax credit as a direct cash payment from the IRS rather than a credit against taxes owed.

This "elective pay" or "direct pay" provision is a genuine game-changer for public sector owners. A school district installing a geothermal system in a new or renovated facility can effectively receive 6–30% of the project cost back as a direct IRS payment.

How it works: The entity files IRS Form 3468 with the elective payment election and completes a pre-filing registration with the IRS before submitting the election. This registration must happen before filing the return for the year the credit is claimed.

Sources: IRS Instructions for Form 3468 (2025); IRS FAQ on PWA under the IRA

 Stacking with State and Utility Incentives

Federal credits are not the only incentives available. Utah, Colorado, Arizona, Montana, and Wyoming each have state-level programs, rebates, or utility incentives that can be layered on top of federal credits. Consult your tax advisor to identify which programs apply in your jurisdiction.

How to Get Started

1.    Engage a qualified MEP or SMEP engineer early. The design of the ground loop, heat pump selection, and integration with the building's mechanical, electrical, and plumbing systems must be engineered properly for both performance and credit eligibility.

2.    Document all costs carefully. Your contractor and engineer should provide itemized documentation covering equipment, labor, and interconnection components.

3.    Understand the PWA requirements if pursuing the enhanced credit. Plan ahead — contractors must pay prevailing wages and use registered apprentices.

4.    Complete pre-filing IRS registration if you are a tax-exempt entity planning to use elective pay under Section 6417.

5.    File the correct IRS forms. Commercial projects use Form 3468 (and Form 7220 if claiming the enhanced rate). Residential projects use Form 5695.

6.    Consult a CPA or tax attorney experienced in energy credits.

Frequently Asked Questions

What is a geothermal heat pump and how does it work?

A geothermal (ground-source) heat pump exchanges heat with the earth through buried piping loops, using the stable underground temperature to heat and cool buildings at 3–5x the efficiency of conventional HVAC. It produces no combustion, operates quietly, and has no outdoor equipment — making it ideal for luxury residential and high-end commercial buildings.

Does geothermal work in cold climates like Utah, Montana, or Wyoming?

Yes. Ground temperatures below the frost line remain stable regardless of surface weather, making geothermal highly effective in cold Mountain West climates. The system performs as well in January in Jackson Hole as it does in July.

Does geothermal work for luxury homes and high-end projects?

Absolutely. Geothermal is an excellent fit for luxury projects: it delivers consistent, whisper-quiet conditioning, eliminates visible outdoor equipment, and has the lowest long-term operating costs of any HVAC approach. Axiom Engineering Group has designed geothermal systems for luxury residential and commercial projects in Utah, Colorado, Montana, and Wyoming.

How much does a geothermal system cost and what does the federal tax credit cover?

Installed costs vary by building size and site conditions. The federal ITC covers 6–30% of qualified project costs — equipment, labor, and interconnection — potentially saving tens of thousands of dollars on a commercial project.

Can a nonprofit, municipality, or school district get the geothermal tax credit?

Yes. The IRA's elective pay provision under Section 6417 allows tax-exempt entities to receive the equivalent of the commercial ITC as a direct IRS cash payment.

What kind of engineer do I need for a geothermal system?

You need a licensed mechanical engineer with geothermal system design experience — ground loop sizing, heat pump selection, integration with electrical and plumbing infrastructure. Integrated SMEP firms like Axiom Engineering Group handle all disciplines under one contract, which simplifies coordination and documentation.

Is geothermal HVAC suitable for problem buildings with comfort complaints?

Yes. In existing buildings with chronic comfort issues, a geothermal system combined with proper commissioning can resolve temperature imbalances that conventional HVAC systems have failed to fix. The stability and precision of ground-source systems makes them especially effective in buildings where comfort has been a persistent problem.

 The Bottom Line

Geothermal heat pump systems offer compelling long-term energy savings and superior comfort performance. The IRA has made the upfront cost case significantly stronger — particularly for commercial and institutional owners who can capture 6–30% of project costs through the Investment Tax Credit, and for public entities who can access those same dollars through direct pay.

If you're designing or renovating a building and want to understand how geothermal could work for your project, the team at Axiom Engineering Group, PLLC is ready to help. We provide integrated structural, mechanical, electrical, and plumbing engineering — ensuring your geothermal system is properly specified, coordinated, and positioned to maximize available incentives. We serve clients in Utah, Colorado, Arizona, Montana, Wyoming, and California.

Axiom Engineering Group works on projects coast to coast. Learn more about our structural, mechanical, plumbing, and commissioning services: aeg.design

This post is for informational purposes only and does not constitute tax or legal advice. Consult a qualified tax professional regarding your specific situation and eligibility.

About the author: John Melvin, PE, is the CEO of Axiom Engineering Group, an SMEP engineering and commissioning firm with offices in Missoula, MT, Salt Lake City, UT, St. George, UT, and San Diego, CA. John is a licensed Professional Engineer with over 20 years of experience designing mechanical, plumbing, and electrical systems for commercial, institutional, hospitality, healthcare, and luxury residential projects.