Henry County Board of Education | New Castle, Kentucky
By David Diaz, CSO, Walker Blue LLC
The Henry County Board of Education installed a 22.7 kW geothermal water-source heat pump system at a total project cost of $937,030. Walker Blue substantiated $851,157 as ITC-eligible basis and supported a federal Investment Tax Credit of approximately $289,000, a 34% effective rate after the domestic content bonus and the tax-exempt bond financing reduction.
When the Henry County Board of Education installed a geothermal water-source heat pump system at its administrative office in New Castle, Kentucky, the project created an opportunity to recover a meaningful portion of the investment through federal clean energy tax incentives.
As a tax-exempt public school district, Henry County had no income tax liability to offset. The Inflation Reduction Act changed that by allowing governmental entities to receive certain clean energy tax credits as a direct payment from the federal government.
Walker Blue was engaged to evaluate the project, determine the eligible Investment Tax Credit basis, analyze available bonus credits, address the impact of tax-exempt financing, and develop the technical substantiation supporting the credit.
The Project
| Qualifying technology | Geothermal water-source heat pump system |
| System capacity | 22.7 kW |
| Total project cost | $937,030 |
| ITC-eligible basis | $851,157 |
| Construction start | June 10, 2024 |
| Placed in service | June 16, 2025 |
| Applicable credit | Section 48 |
| Final ITC rate | 34% |
The Challenge
Determining the value of the federal incentive required considerably more than applying a credit percentage to construction cost.
Walker Blue needed to establish which portions of the $937,030 project represented qualifying energy property under Section 48 and which costs belonged to the broader HVAC and plumbing scope that does not qualify.
The project also carried several open questions. Henry County is a governmental entity, so the project was evaluated for elective pay, commonly called direct pay. The project was financed with tax-exempt bonds, which triggers a statutory credit reduction. And the project had to be tested against the Domestic Content bonus, the Prevailing Wage and Apprenticeship requirements, the Energy Community bonus and the Low-Income Communities bonus.
Each of those items could move the final number materially.
Walker Blue’s Approach
Establishing the ITC-Eligible Cost Basis
Walker Blue reviewed the project’s construction costs and supporting documentation and performed a line-by-line allocation between qualifying energy property and nonqualifying project costs.
Of the $937,030 total, Walker Blue substantiated $851,157 as ITC-eligible basis, roughly 91% of the total investment.
The analysis covered the heat pump equipment, geothermal materials and labor, excavation, sheet metal, controls, insulation, water treatment, general conditions and the related installation labor, while separately identifying plumbing fixtures, duct cleaning and other scope that falls outside qualifying energy property.
Project Size Drove Two Separate Outcomes
At 22.7 kW, the system sits well below the one megawatt threshold in Section 48.
That mattered twice. First, the project is automatically treated as satisfying the Prevailing Wage and Apprenticeship requirements, so Henry County received the full 30% base credit without certified payroll or apprenticeship substantiation.
Second, and less widely understood, the one megawatt threshold is also what unlocks the full 10-percentage-point Domestic Content bonus. A project that qualifies for domestic content but does not meet one of the Section 48(a)(12) project conditions receives only 2 percentage points. The size of this project preserved the full 10.
Capturing the Domestic Content Bonus
Walker Blue reviewed supplier and manufacturer information and evaluated the U.S. content of the project’s applicable manufactured products and components.
Because construction began in 2024, the applicable threshold was 40%. Walker Blue’s analysis supported a domestic cost percentage above that threshold, which increased the project’s credit rate from 30% to 40% before the financing adjustment.
Accounting for Tax-Exempt Bond Financing
Walker Blue reviewed the financing documentation and determined that the project was 100% funded with tax-exempt bonds.
Under the rules incorporated into Section 48, a project financed with tax-exempt obligations is reduced by the lesser of 15% or the share of the project funded with those proceeds. At 100% bond funding, the full 15% reduction applied.
After that adjustment, the project’s effective ITC rate was 34%.
Reviewing Additional Bonus Opportunities
Walker Blue also tested the project for the Energy Community and Low-Income Communities bonus credits using the applicable federal mapping tools.di
Based on the project’s location, neither applied.
Confirming what does not qualify matters as much as confirming what does. It keeps unsupported adders out of the filing.
The Result
Walker Blue’s analysis supported a federal Investment Tax Credit of $289,000 for the Henry County Board of Education, built from:
- $937,030 in total project costs
- $851,157 in substantiated ITC-eligible basis
- 30% base Investment Tax Credit
- 10-percentage-point Domestic Content bonus
- Automatic Prevailing Wage and Apprenticeship compliance based on project size
- 15% credit reduction from tax-exempt bond financing
- 34% effective Investment Tax Credit rate
For a public school district with no tax liability, that is capital returned to the district through the federal elective pay framework.
More Than a Tax Credit Calculation
For tax-exempt organizations pursuing clean energy projects, establishing that a technology qualifies for the ITC is only the beginning.
The value of the incentive depends on eligible cost basis, construction timing, Prevailing Wage and Apprenticeship status, domestic content, project location, financing structure and the documentation available to support each position. Any one of them can move the number by several hundred thousand dollars.
Walker Blue’s role is to bring those pieces together into a defensible analysis and a supporting record the owner and its tax professionals can stand behind.
Henry County’s project qualified under Section 48, which required construction to begin before January 1, 2025. Owners evaluating clean energy projects today face a different and narrower set of rules, and the analysis that determines what a project is actually worth has only gotten more fact-specific.
Frequently Asked Questions
Can a school district claim a federal tax credit if it pays no federal income tax?
Yes, through elective pay under Section 6417, added by the Inflation Reduction Act in 2022. An applicable entity such as a public school district owns the project, meets the applicable requirements, completes pre-filing registration and receives the credit as a payment rather than as an offset against tax.
What counts as ITC-eligible basis on a geothermal project?
Qualifying energy property and the costs required to install it, separated from building scope that serves the facility generally. On the Henry County project, $851,157 of the $937,030 total was substantiated as eligible basis, roughly 91%.
How does tax-exempt bond financing affect the Investment Tax Credit?
The credit is reduced by the lesser of 15% or the share of the project funded with tax-exempt bond proceeds. Henry County’s project was 100% bond funded, so the full 15% reduction applied, taking the rate from 40% to 34%.
Does a project under one megawatt still need prevailing wage and apprenticeship documentation?
A project below the one-megawatt threshold is treated as satisfying the prevailing wage and apprenticeship requirements for the base credit rate. Being under the threshold is also one of the conditions that preserves the domestic content bonus at 10 percentage points rather than 2.
Are geothermal heat pump projects still eligible after the July 2025 tax law?
Geothermal heat pump property continues to qualify under Section 48 on a construction-start schedule. The applicable rate and requirements depend on when construction begins, and a project starting today faces a different analysis than a 2024 start.
Project at a Glance
| Client | Henry County Board of Education |
| Location | New Castle, Kentucky |
| Technology | Geothermal water-source heat pump |
| Project investment | $937,030 |
| ITC-eligible basis | $851,157 |
| Effective ITC rate | 34% |
| Federal incentive | $289,000 |
