The federal tax credit that made heat pumps an easy sell disappeared on January 1, 2026. If you’re evaluating an HVAC acquisition with significant heat pump revenue, the trailing 12 months are lying to you.
You’re looking at an HVAC business where heat pumps represent 40% of install revenue. The numbers are strong. The growth trend from 2023 to 2025 is beautiful — up and to the right, exactly what a buyer wants to see.
Here’s the problem: a huge chunk of that growth was subsidized by a $2,000 federal tax credit that no longer exists. The homeowners who said yes to a $14,000 heat pump system were really saying yes to a $12,000 heat pump system. Now they’re back to saying yes — or more likely no — to the $14,000 version, plus an 8-10% tariff impact surcharge on top.
That’s not a revenue trend. That’s a subsidy cliff. And if you pay a multiple on peak-subsidy revenue, you’re overpaying.
What the Section 25C Credit Actually Did for Heat Pump Sales
The Energy Efficient Home Improvement Credit — Section 25C of the tax code — gave homeowners up to $2,000 per year for qualifying heat pump and heat pump water heater installations. For central air conditioning systems that met efficiency thresholds, the credit was $600.
In real terms, that $2,000 credit represented a 13-17% cost reduction on a typical $12,000-$15,000 ducted heat pump installation. That’s not a rounding error. That’s the difference between a customer signing the proposal and saying “let me think about it.”
The credit came out of the Inflation Reduction Act in 2022. Here’s what happened next:
- Contractors built their entire marketing around it. “Get up to $2,000 back” was on every door hanger, every Google ad, every proposal cover page.
- Heat pump installations grew over 40% nationally from 2022 to 2025, according to Air-Conditioning, Heating, and Refrigeration Institute (AHRI) shipment data.
- Sales teams learned to present the “net cost after credits” number, not the real price. Customers anchored on the lower number.
- Proposal templates, financing calculators, and close scripts were all structured around tax credit eligibility.
There was also Section 25D — a 30% uncapped credit for geothermal heat pump installations. That one survived for geothermal specifically, but the broader 25C credit for air-source heat pumps and standard equipment? Gone as of January 1, 2026.
The industry built a demand engine on a temporary incentive. Now the incentive is gone, and the demand engine is sputtering.
The Revenue Problem You Can See in the Trailing 12 Months
Here’s what this means when you’re sitting across from a seller or their broker looking at financials.
The target’s 2025 heat pump install revenue — the number they’re proudest of, the one driving the growth story — was earned under market conditions that no longer exist. Every heat pump proposal that closed in 2025 had a built-in $600-$2,000 demand incentive baked into the customer’s decision. That incentive vanished.
How to spot the exposure:
- Request a revenue breakdown by install type. Not just “installation revenue” as a lump. You need heat pump installs, gas furnace installs, AC-only installs, and dual fuel installs broken out separately. If the seller can’t provide this, their bookkeeping is a problem you should read about in your revenue quality score analysis.
- Calculate the heat pump install percentage. Total heat pump install revenue divided by total install revenue. This is your exposure number.
- Flag the risk tier:
- Under 20% heat pump mix: Low exposure. Tax credit loss is a headwind, not a crisis.
- 20-40% heat pump mix: Moderate exposure. Revenue adjustment needed.
- Over 40% heat pump mix: High exposure. The growth story you’re being sold may be a subsidy story.
Now here’s where it gets ugly. The tax credit loss isn’t happening in isolation. Equipment prices are up 8-10% from tariffs. So the homeowner math looks like this:
| Factor | 2025 (Credit Active) | 2026 (Credit Gone + Tariffs) |
|---|---|---|
| System price | $14,000 | $15,200 (+8.6% tariff) |
| Tax credit | -$2,000 | $0 |
| Net cost to homeowner | $12,000 | $15,200 |
| Effective increase | — | +26.7% |
A 27% net cost increase to the homeowner. That’s not “some softening in demand.” That’s a demand cliff. And it hits hardest at the price-sensitive segment that was only buying heat pumps because the credits made them competitive with gas equipment. Those customers are going right back to gas furnaces, or they’re going to repair instead of replace.
The Geographic Filter — Mandate States vs. Voluntary Markets
Not every market is equally exposed. This is the single most important variable in your due diligence on heat pump revenue.
Mandate states: demand persists regardless of credits
Some states have made heat pumps effectively mandatory through building codes and equipment restrictions:
- New York: All-electric requirement for new buildings under seven stories, effective January 2026. NYC Local Law 154 bans fossil fuel equipment in most new construction.
- California: Commercial heat pump water heater requirements already in force. Residential gas furnace ban for new construction phasing in by 2030.
- Oregon: Residential heat pump mandate for new construction, with the Climate Protection Program restricting gas equipment.
- Colorado: Gas ban options for local jurisdictions, with Denver and Boulder already restricting natural gas hookups in new buildings.
- Washington, Massachusetts: Moving toward electrification mandates at various stages.
In these states, homeowners and builders don’t have a choice. The tax credit was a nice bonus, not the purchase driver. Losing it stings, but it doesn’t crater demand.
Non-mandate states: demand was incentive-driven
In Texas, Florida, Georgia, the Carolinas, and most of the Midwest and South, there’s no code requiring heat pumps. Homeowners chose them because the economics made sense — and a $2,000 tax credit was a big part of those economics.
Without the credit, a conventional gas furnace or straight AC replacement is cheaper upfront and familiar. The efficiency argument still holds over the equipment’s lifetime, but that’s a harder sale when the customer is staring at a $3,200 higher price tag today.
State rebates: a partial offset
Some states have launched HEEHRA (Home Efficiency and Electrification Rebate) and HOMES rebate programs that partially replace the lost federal credit. These are income-qualified and vary wildly by state — some states have disbursed funds, others haven’t even launched their programs yet.
During diligence, check whether the target’s state has an active rebate program and what dollar amounts are available. A functioning state rebate can offset 30-60% of the lost federal credit. A state that hasn’t launched its program yet? That’s a gap with no fill.
The due diligence question that matters: What percentage of the target’s heat pump installations occurred in mandate jurisdictions vs. voluntary markets? If 80% of their heat pump revenue comes from a mandate state, you’re fine. If 80% comes from a state where heat pumps are optional and the credit was the closer, your acquisition math needs to change.
How to Adjust the Revenue Projection
This isn’t guesswork. There’s a straightforward way to model the impact. Here’s the five-step process.
Step 1: Isolate heat pump install revenue
Pull heat pump installation revenue out of total revenue. Include ducted heat pumps, ductless mini-splits, dual fuel systems, and heat pump water heaters. Exclude service and maintenance revenue on existing heat pump systems — that revenue isn’t going anywhere.
If the seller lumps all installs together and can’t split them, you have a data quality problem that goes beyond this analysis. See revenue quality score.
Step 2: Split by jurisdiction type
Categorize the heat pump install revenue into two buckets:
- Mandate-driven: Installs in jurisdictions where heat pumps are required by code or where gas restrictions effectively force the decision.
- Voluntary-market: Installs in jurisdictions where the customer chose a heat pump over available gas alternatives.
This might require looking at job addresses, not just city-level summaries. A company operating in both Northern California (mandate) and Nevada (voluntary) has a split you need to quantify.
Step 3: Apply a reduction to voluntary-market revenue
For voluntary-market heat pump install revenue, apply a 15-30% reduction. Where you land in that range depends on:
- 15% reduction: State has active HEEHRA/HOMES rebates, target has already adjusted pricing, local utility rebates still in effect.
- 20-25% reduction: State rebates partially launched, target hasn’t adjusted proposals, moderate price sensitivity in customer base.
- 30% reduction: No state rebates, high price sensitivity, target was heavily marketing the federal credit as the primary value proposition.
Step 4: Account for surviving credits
The 30% geothermal tax credit under Section 25D survives through 2032. If the target does geothermal installations, that revenue stream is unaffected.
But be realistic: geothermal represents less than 3% of residential HVAC installations nationally, per DOE data. Unless this is a specialty geothermal contractor, the surviving credit doesn’t move the needle. Don’t let a seller wave the geothermal flag to distract from the air-source revenue problem.
Step 5: Check post-expiration behavior
Has the target adjusted since January 2026? Specifically:
- Did they update proposal templates to remove tax credit references?
- Did they adjust pricing strategy — higher financing incentives, bundled maintenance, anything to offset the lost credit?
- What do Q1 and Q2 2026 heat pump close rates look like compared to the same period in 2025?
- Have they shifted sales focus toward mandate-driven markets or segments?
A target that saw the cliff coming and adapted is a fundamentally different acquisition than one still wondering why close rates dropped.
The Flip Side — When the Tax Credit Loss Creates a Buying Opportunity
I’ve spent 1,500 words telling you about a problem. Now let me tell you why that problem might be your opportunity.
Motivated sellers
HVAC business owners who rode the heat pump wave from 2022 to 2025 saw their best revenue years ever. Some planned to sell on those numbers. The owners who waited until 2026 to list are now watching their install revenue soften in real time.
A seller whose Q1 2026 revenue is down 15-20% from Q1 2025 is not in the same negotiating position they were six months ago. They know it. Their broker knows it. That’s leverage — use it.
The capability retains value
Here’s the thing about heat pump expertise that a lot of buyers miss: the heat pump premium isn’t just about current revenue. It’s about capability.
A company with certified heat pump installers, established supplier relationships with Mitsubishi and Daikin, and a reputation for quality cold-climate installations has something that takes years to build. The demand dip is temporary. The capability is permanent. In mandate states, the regulatory trajectory only moves in one direction.
If you can buy that capability at a discount because the trailing 12 months don’t look as pretty as 2025, you might be getting a better deal than the buyer who paid peak-multiple in mid-2025.
Mandate states make this almost irrelevant
In New York, California, Oregon, and the other mandate markets, the tax credit loss barely registers. Code requirements drive demand. Period. If the target operates primarily in mandate states, the credit expiration is noise, not signal. Focus your diligence elsewhere.
The smart buyer playbook
- Identify a target with strong heat pump capability but softening 2026 revenue
- Quantify the credit-driven demand loss using the five-step process above
- Present an offer that reflects the adjusted revenue projection, not the peak
- Acquire at a discount that compensates for the demand correction
- Ride the long-term electrification trend with a business you bought below peak valuation
The best time to buy a heat pump business wasn’t 2024, when everyone was paying premiums on subsidized growth. It might be late 2026 or 2027, when the demand correction has fully played out and sellers have adjusted their expectations.
What This Means for Your Offer
Let’s make this concrete. You’re looking at a $1.8M asking price on a business with $400K SDE and 45% of install revenue from heat pumps.
Scenario A: Non-mandate state, high heat pump exposure
- Heat pump install revenue: ~$540,000 (45% of $1.2M total install revenue)
- Voluntary-market share: 90%
- Applicable reduction: 25%
- Adjusted heat pump install revenue: $540,000 - $121,500 = $418,500
- Total install revenue reduction: $121,500
- Impact on SDE (assuming 35% flow-through): -$42,525
- Adjusted SDE: $357,475
- At 4x multiple: $1.43M (vs. $1.8M asking price)
That’s a $370,000 gap between what the seller is asking and what the adjusted math supports. That’s not a negotiating tactic — that’s arithmetic. Bring the numbers to the table.
Scenario B: Mandate state, same heat pump exposure
- Heat pump install revenue: ~$540,000
- Mandate-driven share: 85%
- Voluntary-market reduction: 25% on remaining 15%
- Adjusted heat pump install revenue: $540,000 - $20,250 = $519,750
- Total install revenue reduction: $20,250
- Impact on SDE: -$7,088
- Adjusted SDE: $392,912
- At 4.5x multiple (mandate state premium): $1.77M
Minimal adjustment. The mandate premium holds because the demand driver is regulation, not tax credits.
The principle
The seller’s 2024-2025 financials represent peak subsidized demand. In a non-mandate market with heavy heat pump exposure, those numbers are the high-water mark, not the baseline.
Don’t pay a multiple on revenue that won’t repeat. Run the acquisition math on what the business will actually produce under current conditions — no credit, higher equipment costs, and a customer base that’s re-evaluating whether a heat pump is worth the premium over gas.
If the math still works at the adjusted number, you’ve found a real business with real demand, not a subsidy play. If it doesn’t, walk — or make an offer that reflects reality.
The seller might not like it. Their broker definitely won’t. But you’re not buying a story. You’re buying cash flow. Make sure the cash flow you’re paying for actually exists in a post-credit world.
