Municipalities urged to use federal energy tax credits and elective pay to fund ground source heat pumps

Undaunted K‑12 hosted a webinar for municipal sustainability managers and school project teams explaining how federal energy tax credits and the elective pay process can bring substantial cash to local clean‑energy building projects. Presenters said the Inflation Reduction Act opened eligibility for municipalities and other tax‑exempt entities to claim these credits through an elective pay pathway that converts tax credits into IRS cash payments.

Gabriela Rodriguez, network and engagement manager at Undaunted K‑12, said the elective pay process requires that the owner of a completed, placed‑in‑service project file pre‑application information, submit required tax forms by the IRS deadline and, if approved, receive a paper check issued to the filer. "These are not grants; they function very differently," Rodriguez said, and recommended that tax‑exempt entities engage a tax professional early in the project timeline.

Why it matters: the investment tax credit for ground source heat pumps (Section 48) remains intact and generally covers about 30% of eligible project costs — potentially rising to 50% when projects meet bonus criteria. Rodriguez said that ground source heat pump projects that start construction by the end of 2034 retain eligibility, giving municipalities a long runway to plan.

Presenters outlined three core factors that determine the credit amount: the eligible cost basis for the project, the base and bonus credit percentages, and later adjustments tied to other funding sources. Bonus increases are available for meeting federal prevailing wage and apprenticeship requirements, locating in designated energy communities or brownfields, and meeting domestic‑content thresholds. Rodriguez cautioned that projects over 1 megawatt face stricter rules: they must meet labor standards and — for construction starting in 2026 — domestic content requirements to receive any credit.

Speakers also warned that grants do not automatically reduce the tax credit cost basis, but the IRS will reduce the credit if combined funding creates an "excess benefit" that exceeds project cost; additionally, tax‑exempt bond financing can reduce credits by up to 15% under IRS rules. Rodriguez used a $10 million example to show how a 30% credit and various funding sources interact to determine the final credit amount.

Presenters recommended practical steps for municipalities: raise awareness about these credits early in project planning, include tax‑credit and labor requirements in schematic and bid documents, engage tax attorneys and owners’ project managers (OPMs) at the outset, and gather documentation through construction so filing is straightforward. "Don't fall in the trap of thinking you only hire the tax professional for the last step," Sarah Ross of Undaunted K‑12 said; tax counsel, she added, can redline specifications and help ensure compliance across design, bidding and construction.

The webinar closed with resources offered by Undaunted K‑12 (an energy tax credit schools hub, a modern HVAC report and a one‑pager on the ground source heat pump tax credit), and presenters said they would hold office hours and share slides and links with participants.

Next steps: municipalities interested in pursuing these credits should identify candidate projects during schematic design, budget for predevelopment tasks (for example, test wells), and ensure project teams include engineers, tax advisors and procurement staff who can incorporate labor and domestic‑content requirements into contracts.