How public schools can still secure clean energy tax credits after the One Big Beautiful Bill Act
The One Big Beautiful Bill (OBBB) Act, signed into law on July 4, 2025, has reshaped the landscape of clean energy incentives for public institutions. For public schools, this legislation presents a rare and time-sensitive opportunity to still receive direct payments (think cash) for investing in solar and geothermal energy systems.
Here’s what school districts need to know — plus what to do over the next two years to take full advantage of these credits before they expire.
What is direct pay, and why does it matter for schools?
Under the Inflation Reduction Act (IRA), tax-exempt entities like public schools became eligible for direct pay (also known as elective pay) for certain clean energy tax credits. This means that instead of needing tax liability to benefit from credits, schools can receive a cash payment from the IRS equal to the value of the credit, which could be as high as 60%.
The OBBB preserves and modifies this provision, but it also introduces new deadlines and phaseouts. For solar electric projects, there are two key takeaways:
- To claim a tax credit for projects that will begin construction after July 4, 2026, the system must be placed in service by December 31, 2027.
- Projects that begin construction before July 5, 2026, do not face a placed-in-service deadline, but do face the regular four-year phaseout of the credit generally beginning in 2032.
Guidance on the beginning of construction is in a state of flux. However, we anticipate that it will require work of a physical nature on the solar system to commence and continue throughout the construction process.
Another complication for solar systems is the material assistance from prohibited foreign entities rule. Starting with systems beginning construction in 2026, material assistance means that no more than 60% of the district’s direct costs of manufactured products and components can be mined, produced or manufactured by a prohibited foreign entity.
A prohibited foreign entity includes entities organized under the laws of China, which is from where many solar components or products are sourced. And the allowed percentage decreases by 5% every year through 2029.
If there is excess material assistance from a prohibited foreign entity, the property is not eligible for the credit.
Are geothermal energy systems affected by the OBBB?
Unlike solar systems, which must provide electricity to qualify for the credit, geothermal energy systems generally provide heating and cooling. Geothermal energy systems use natural heat from the earth to provide heating and cooling.
Think of it as a battery for heat. The geothermal energy system stores heat in the battery to make the building cooler and draws on stored heat to make it warmer.
Also, unlike solar systems, geothermal systems do not face beginning-of-construction and placed-in-service deadlines, just the general phasedown starting in 2033. Finally, unlike solar systems, geothermal systems generally use domestically sourced components and are typically not subject to the material assistance rule.
What should schools do to claim renewable energy tax credits before they phase out after 2027?
The clock is ticking on your school or district’s ability to claim certain renewable energy tax credits, especially if you won’t start construction until after July 4, 2026. Here’s what you need to do to access solar and wind credits, specifically, while you still can:
1. Identify eligible projects
Start by assessing your facilities for solar photovoltaic or geothermal heat pump potential. Projects that reduce energy consumption or replace fossil fuel-based systems are prime candidates.
Consider rooftop solar, ground-mounted arrays or geothermal systems for heating and cooling. For solar projects, the timeline for beginning construction and how much will be sourced from China must be carefully considered.
2. Engage a qualified advisor
Work with a tax advisor or energy consultant experienced in IRA credits and public sector projects. The right advisor can help you navigate the complex process to secure substantial credits for your school or district.
3. Apply for pre-filing registration
Before claiming direct pay, schools must register the project with the IRS through the pre-filing registration portal. This step is mandatory and must be completed before filing a tax return to claim the credit.
4. Begin construction as soon as possible
If you’re able to start construction before July 4, 2026, you’ll extend your eligibility window for certain energy tax credits by several years. And if you can’t start building until after July 4, 2026, you must bring the project online before 2028 to keep your credit eligibility. In either scenario, speed is essential.
5. Track construction start and service dates
For solar projects, you must track the beginning of construction and placed-in-service dates carefully. Depending on the Treasury guidance, what constitutes the beginning of construction may differ between the material assistance rule and for other purposes.
What happens after 2027?
Solar projects that begin construction after July 4, 2026, are placed in service after 2027 or receive material assistance from a prohibited foreign entity may lose eligibility for the full credit. While geothermal and other non-solar technologies may still qualify under Section 45Y and Section 48E, the value of the credit will begin to phase down after 2032.
The next 24 months are critical. With the right planning, public schools can transform their energy infrastructure, reduce utility costs and receive substantial federal funding — all while modeling sustainability for students and communities.
However, you have to begin taking action right now. Solar projects, especially, can take only a few months to execute once work kicks off, but may require significantly longer than that due to delays or permitting issues. If you can, collaborate with experienced advisors and construction firms to help you move through the process as quickly as you can.
How Wipfli can help
Wipfli advises school leaders on tax strategy and growth. Ask us for help assessing your eligibility for energy tax credits, navigating the construction process and meeting the requirements to receive direct pay. Visit our tax policy page for further updates or learn more about energy incentives.
