In 2022, Congress passed the Inflation Reduction Act (IRA), which includes a host of tax incentives intended to accelerate investment in clean energy solutions in many sectors of the economy. Higher education institutions, both public[1] and private including tax-exempt organizations, may benefit from these incentives.
This article discusses some of the tax credits applicable to education institutions under the IRA, especially if the organization is considering investing in any of the following activities:
- Building new energy-efficient buildings
- Making improvements to existing facilities
- Installing solar panels
- Purchasing a new fleet of electric vehicles, e.g., buses, vans, or delivery trucks
- Installing charging stations for electric vehicles
Many of these credits are available as a base amount with additional bonus credit amounts. One of the most pursued bonus credits is colloquially referred to as the “five times” bonus credit. A common way to qualify for the “five times” bonus credit is to meet the prevailing wage and apprenticeship (PWA) requirements, as applicable. The IRS’ initial guidance and the following proposed regulations were issued to help taxpayers comply with the PWA requirements. For certain credits, the amount of the credit can also increase if the project meets certain domestic content requirements for steel, iron, and manufactured products. An extra bonus credit on certain projects in an “energy community” may be claimed, and for certain wind and solar facilities a low-income bonus credit is possible depending on the situation.
Some of the tax credits noted below may be transferred or elected for “direct pay.” Tax-exempt entities, states and political subdivisions, the Tennessee Valley Authority, Indian tribal governments, Alaska Native Corporations, and rural electricity cooperatives among others may elect to treat IRA tax credits for “direct pay,” which functions similar to a “refundable” tax credit. Taxable entities also have the option for the “direct pay” election for a limited number of credits. All other taxpayers have the option to transfer (sell) certain tax credits to unrelated third parties. Credits may only be transferred once.
With the direct pay option, many of these tax credits effectively result in “cash back” that helps offset costs of the energy-efficient investments a tax-exempt institution is considering. For a list of such tax credits and more information for how many education institutions can take advantage of these incentives, view our Nonprofit & Governmental Organizations to Benefit from Tax Credit Opportunities in the IRA article.
Investment Tax Credit (ITC) for Energy Property
For projects placed in service prior to January 1, 2025, under Section 48, generally the IRA provides a “base” credit of 6% of qualified investment costs of a renewable energy project. Qualified fuel cell, solar, geothermal deposit, dynamic glass, small wind, energy storage, waste energy recovery, biogas, microgrid controllers, microturbines, specific ground heating or cooling property, and combined heat and power properties are eligible for this tax credit. There are specific rules for certain types of energy property that could affect this base 6% amount. Reach out to your FORVIS advisor for more information.
The credit amount can increase in the following ways:
- Meeting the “five times” bonus credit requirements, by qualifying for one of the following:
- Project maximum net output is less than one megawatt
- Project begins construction prior to January 29, 2023
- Project meets the prevailing wage and apprenticeship requirements
- Additional bonus credit if the project meets certain domestic content requirements
- Additional bonus credit if the property is in an “energy community”
- Additional bonus credit for certain wind and solar projects depending on the specifics of the project
This means the maximum ITC can be as high as 70%.
For facilities placed in service after December 31, 2024, the Section 48E credit may apply for the project. Different rules apply when considering eligibility, so consideration of the placed-in-service date should be emphasized when modeling out future benefit of clean energy investments.
Here are some examples of what an educational institution can invest in to take advantage of this opportunity:
- Installing solar panels on the roof of your facility
- Using energy-efficient batteries for energy storage
- Updating your heating and power systems
- Installing dynamic glass
Tax-exempt education institutions may use the direct pay option and elect to receive payments equal to the credit amount. Taxable education institutions may elect to transfer credits if they opt out of claiming the credit on their own return. To learn more about how the ITC can benefit tax-exempt education institutions, read our Implications of the Inflation Reduction Act on Tax-Exempt Entities article.
Renewable Electricity Production Tax Credit (PTC)
Under Section 45, facilities generating electricity for sale to unrelated parties from certain renewable electricity sources are potentially eligible for the PTC for 10 years after the project is placed in service. To qualify for the §45 credit, construction of the project must begin before January 1, 2025. After 2024, IRC Section 45Y takes its place for facilities that keep the greenhouse emissions rate at zero.
Similar to the ITC noted above, the credit amount could be impacted by whether the “five times bonus” credit applies, if the domestic content requirements are met, and if the project is located in an energy community. The base credit amount is adjusted annually for inflation. For 2023, if property was placed in service after December 31, 2021, the PTC as adjusted for inflation is 0.3 cents per kWh for electricity generated by landfill gas, open-loop biomass, municipal solid waste resources, and small irrigation power facilities, and up to 0.55 cents per kWh for electricity generated from wind, closed-loop biomass, solar and geothermal resources. These amounts can be increased by the five times bonus credits and other bonus credit amounts.
Tax-exempt education institutions may elect to receive payments equal to the full amount of credits generated through the direct pay option for qualified facilities placed in service after December 31, 2022 and for which construction began before January 1, 2024. If the beginning of construction date is after 2023, while the elective payment is still available, reductions to the available credit could apply (subject to exceptions) if the domestic content bonus credit is not met for the §45 credit. If pursuing the §45Y credit, the available credit begins to phase out depending on the applicable year. If an organization uses tax-exempt bonds for financing, the credit is reduced by up to 15%.
Energy-Efficient Commercial Buildings Deduction
The IRA significantly expanded the energy efficient commercial buildings property deduction under §179D. Starting January 1, 2023, the base deduction is $0.50 per square foot, with a maximum deduction of $5 per square foot if the “five times” bonus credit requirements and certain energy efficiency requirement are met. The qualification for the tax deduction is available when a building’s energy cost is reduced by at least 25% compared to an applicable reference building (meeting the applicable American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) standards). The IRA eliminated the lifetime cap, and deduction limits will now reset every three or four years. The IRA also expanded the §179D deduction eligibility to designers of commercial buildings owned by certain tax-exempt entities, including tax-exempt universities.
The IRA also changed the reference building standard used to determine the building’s energy efficiency. Buildings placed in service on or after January 1, 2023 should use the ASHRAE standards affirmed by the Secretary within the last four years before the placed-in-service date, a change from the current standard of two years before construction began.
If your educational institution is considering making energy-efficiency improvements to your building envelope, HVAC, hot water systems, or interior lighting, then the expanded §179D deduction may be worth exploring.
Qualified Commercial Clean Vehicles Credit
If an educational institution is considering investing in a fleet of vehicles for commercial use, the IRA provides a tax credit for purchasers of qualified commercial clean vehicles (the §45W credit). The credit amount is the lesser of:
- 15% of the vehicle’s basis, i.e., cost to the buyer, or 30% for vehicles without internal combustion engines, i.e., not powered by gas or diesel, OR
- The amount the purchase price exceeds the price of a comparable internal combustion vehicle, i.e., the incremental cost of the vehicle.
This credit is capped at $7,500 for vehicles with a gross vehicle weight rating less than 14,000 pounds and $40,000 for all other qualifying commercial clean vehicles. However, there is no limit on the number of clean vehicles your organization can claim, and the credit can be carried over as a general business credit.
For organizations that qualify as an applicable entity, an elective payment election can be made to receive cash back in lieu of a credit.
For additional information on the elective payment election, organizations can reference our New IRS Elective Pay & Transferability Guidance.
Before purchasing a vehicle, remember to also check the IRS index of qualified manufacturers. In order to qualify for the credit, the vehicle must be made by a qualified manufacturer.
Alternative Fuel Vehicle Refueling Property Credit
For education institutions in low-income communities or non-urban areas, the IRA provides a tax credit for alternative fuel, e.g., electricity, ethanol, natural gas, hydrogen, biodiesel, and others, vehicle refueling, and charging property, starting in 2023 and through December 31, 2032.
For tax-exempt organizations, the base credit amount is 6% of the cost, limited to $100,000 credit per item of property. However, organizations can claim a 30% credit for projects meeting the “five times bonus” requirements.
Tax-exempt education institutions may elect direct pay for this tax credit.
Our Approach
Our professionals at FORVIS can work with your educational institution to help:
- Identify tax opportunities under the IRA
- Quantify the potential financial impact of these tax incentives
- Model the business case for a clean energy investment
- Aid in documentation and recordkeeping for the prevailing wage and apprenticeship requirements
- Educate you on the direct pay election and related process
If you have any questions or need assistance, please reach out to a professional at FORVIS.
- 1 The Final Regulations for the direct pay option clarify that an applicable entity is “1) any organization exempt from the tax imposed by subtitle A of the code—by reason of subchapter F of chapter 1 of subtitle A; or because it is the government of any U.S. territory or a political subdivision thereof; 2) any state, the District of Columbia, or political subdivision thereof… [or] 7) an agency or instrumentality of certain applicable entities” (§1.6417-1(c)).