The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, has reshaped the federal incentive landscape for geothermal heat pump (GHP) installations in public schools. The law preserves core credits but introduces new compliance burdens, truncated deduction windows, and a USDA application pause that narrows the path to full funding for rural district facilities teams and their EPC partners.
Background
School districts have increasingly pursued GHP installations since the Inflation Reduction Act of 2022 introduced a direct-pay - or "elective pay" - mechanism for tax-exempt entities. Under this provision, public schools and municipal governments can receive a cash payment from the IRS equal to the value of the Section 48 Investment Tax Credit (ITC), potentially as high as 60%.
Unlike solar and wind technologies, which face aggressive phaseouts under the OBBBA, GHP systems retain more favorable treatment. GHP systems fall exclusively under Section 48 - not Section 48E - and remain eligible for the Section 48 credit through 2032, while credits for most other renewable technologies transition to Section 48E or sunset.1The “One Big Beautiful Bill” Act – Navigating the New Energy Landscape | Insights | Sidley Austin LLP Notably, the Foreign Entities of Concern (FEOC) rules introduced under the OBBBA, which can affect Section 48E credit eligibility, do not apply to GHP technologies.
Details
The Section 48 credit structure gives rural school projects a meaningful financial lever - but one with conditions. 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 of capacity - automatically qualify for the full 30% rate. Projects exceeding 1 MW must satisfy prevailing wage and apprenticeship (PWA) requirements to reach 30%; otherwise, they are limited to 6%.
Additional stacking opportunities exist. Projects may earn a further 10% increase each for using domestic materials and for location in a designated energy community. Combined, a qualifying rural school project can reach a cash reimbursement of up to 50% of total project costs according to the National Center on School Infrastructure.
The OBBBA also introduced a material change to one widely used deduction. Section 70507 terminates the energy-efficient commercial buildings tax deduction (Section 179D) for projects beginning construction after June 30, 2026. For facilities teams and EPCs still planning school GHP projects that could qualify under Section 179D - which allows deductions of up to $5.81 per square foot for buildings meeting prevailing wage and energy reduction thresholds - that deadline has already entered the critical window.
Compliance documentation has grown more demanding. Maximizing credits requires meeting PWA requirements and domestic content standards, both of which demand meticulous recordkeeping. For PWA compliance, property owners must confirm that all laborers and mechanics employed by the owner, contractors, and subcontractors are paid federal prevailing wages for the construction type and location, and that worker classifications and hours align with Department of Labor determinations. For Section 48 ITCs, the seller must also provide an annual prevailing wage compliance report during the five-year recapture period. Facilities teams and procurement managers should factor these obligations into contract terms with EPCs and subcontractors from the outset.
On the grant side, rural school districts that anticipated supplementing ITC proceeds with USDA Rural Energy for America Program (REAP) grants face an additional complication. REAP has paused accepting applications and plans to issue guidance for Fiscal Year 2026 funding. Importantly, K-12 schools are not listed among REAP's primary eligible applicant categories - the program is principally directed at agricultural producers and rural small businesses. REAP is therefore most relevant to projects structured through eligible local utility or cooperative partners rather than directly through the school district.
The OBBBA also eliminated one legacy tax benefit for commercial GHP installations. Section 70509 removes five-year cost recovery for geothermal heating and cooling systems, which previously qualified for accelerated depreciation. While this does not directly affect tax-exempt school districts claiming elective pay, it may alter the economics for EPC firms or third-party ownership structures used to finance larger projects.
Outlook
Unlike solar and wind, which face accelerated phaseouts under recent legislation, GHP remains eligible for the ITC - offering planning certainty for long-term building and infrastructure projects. The current Section 48 base credit rate of 6% holds through 2032, dropping to 5.2% in 2033 and 4.4% in 2034, with full phaseout for projects beginning construction in 2035 according to tax advisory firm Plante Moran. Rural school districts, EPCs, and local utilities evaluating GHP installations should initiate IRS pre-filing registration, confirm PWA contractor compliance structures, and advance energy audit documentation now - both to secure the full credit rate and to meet the June 30, 2026 construction commencement deadline for Section 179D before it lapses.
