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 every sector of the economy. Higher educational institutions, both public1 and private including tax-exempt organizations, stand to benefit from these incentives.
This article discusses some of the tax credits available to educational institutions under the IRA, especially if your organization is considering investing in any of the following activities:
- Building new energy-efficient buildings
- Making ongoing improvements to existing facilities
- Installing solar panels
- Purchasing a new fleet of vehicles, e.g., buses, transportation for parking lots, etc.
- Installing charging stations for electric vehicles
Note that many of these credits are available as a base amount with additional bonus credit amounts available. The first bonus amount is a five-times multiple if certain prevailing wage and apprenticeship requirements are met. The IRS provided initial guidance discussing the prevailing wage and apprenticeship requirements. For certain credits, the amount of the credit also can increase up to 10 percentage points if the project meets certain domestic content requirements for steel, iron, and manufactured products. In some cases, an extra 10% bonus credit may be claimed on projects in an “energy community.”
Some of the tax credits discussed below may be transferred or elected as “direct pay.” Tax-exempt entities, states and political subdivisions, the Tennessee Valley Authority, Indian tribal governments, Alaska Native Corporations, and rural electricity cooperatives may elect to treat IRA tax credits as “refundable” tax credits. All other taxpayers have the option to transfer and sell certain tax credits to unrelated third parties. Credits may only be transferred once and must be taken in the taxable year in which the credit is determined or in the following year.
With the direct pay option, many of these tax credits may be used as cash grants that help offset costs of the energy-efficient investments your institution is considering over the next 10 years. For a full list of such tax credits and more information for how educational institutions can take advantage of these incentives, view FORsights™ article, “Nonprofit & Governmental Organizations to Benefit from Tax Credit Opportunities in the IRA.”
Investment Tax Credit (ITC) for Energy Property
For projects beginning construction prior to January 1, 2025, the IRA provides a credit of 6% (base amount) of qualified investment costs of a renewable energy project. Fuel cell, solar, geothermal, small wind, energy storage, biogas, microgrid controllers, and combined heat and power properties are eligible for this tax credit. Note that for geothermal heat property, the base investment tax credit is 6% if construction begins before January 1, 2033, and then phases out to 5.2% for construction beginning after December 31, 2032 and 4.4% for construction beginning after December 31, 2033 and before January 1, 2035.
The credit amount can increase in three ways:
- By five times the base amount for projects meeting prevailing wage and apprenticeship requirements,
- Another 10% if the project meets certain domestic content requirements, and
- Another 10% if the property is in an “energy community,” e.g., certain low-income communities
This means the maximum ITC can be as high as 50%.
Here are some examples of what your educational institutions 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
Education institutions may use the direct pay option and elect to receive payments equal to the credit amount. To learn more about how the ITC can benefit education institutions, view FORsights article, “Implications of the Inflation Reduction Act on Tax-Exempt Entities.”
Renewable Electricity Production Tax Credit (PTC)
Facilities generating electricity for sale to third parties from renewable electricity sources are potentially eligible for the PTC for 10 years after the project is placed in service. To qualify, construction of the project must begin before January 1, 2025. After 2024, IRC Section 45Y takes its place for facilities that keep greenhouse emissions zero.
Like the ITC discussed above, the credit amount is impacted by whether prevailing wage and apprenticeship requirements are met, if the domestic content requirements are met, and if the project is in an energy community. The base credit amount is adjusted annually for inflation. For 2022, the maximum PTC is 1.3 cents per kWh for electricity generated by landfill gas, open-loop biomass, municipal solid waste resources, and small irrigation power facilities, and up to 2.75 cents per kWh for electricity generated from wind, closed-loop biomass, and geothermal resources.
Educational institutions may elect to receive payments equal to the credits generated through the direct pay option for qualified facilities placed in service after December 31, 2022 and construction before January 1, 2024. For construction after January 1, 2024, institutions are eligible for 90% of the credit if domestic content is not met. If an organization uses a tax-exempt bond 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 $0.5 per square foot, with a maximum deduction of $5 per square foot if prevailing wage and apprenticeship requirements 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. The IRA eliminated the lifetime cap, and deduction limits will now reset every three or four years, depending on the building. The IRA also expanded the §179D deduction eligibility to designers of commercial buildings that are owned by tax-exempt entities, including private 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 American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) standards affirmed by the secretary at least four years before construction completion, 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, or interior lighting, then the expanded §179D deduction may help offset some of the costs of these projects. Allocating the deductions to the designer of the project may offer an opportunity to reduce the cost of the project, though states such as Florida or Ohio are evaluating a prohibition on public universities and colleges soliciting payment in exchange for these deductions.
Qualified Commercial Clean Vehicles Credit
If your educational institution is considering investing in a new fleet of vehicles for commercial use, the IRA provides a tax credit for purchasers of qualified commercial clean vehicles. 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 under 14,000 pounds and $40,000 for all other clean vehicles. However, there is no limit on the number of clean vehicles your institution can claim, and the credit can be carried over as a general business credit.
When vehicles are sold to certain tax-exempt organizations or governmental units, the vehicle dealer is treated as the taxpayer that placed the vehicle in service for purposes of this credit, but make sure the seller discloses to you as the buyer the amount of any new clean vehicle tax credit allowable for the vehicle and take this in consideration when establishing the price.
Before purchasing a vehicle, remember to also check the IRS index of qualified manufacturers since to qualify for the credit, the vehicle must be made by a qualified manufacturer.
Alternative Fuel Vehicle Refueling Property Credit
For educational institutions in low-income communities or non-urban areas, the IRA provides a tax credit for alternative fuel—for example, electricity, ethanol, natural gas, hydrogen, biodiesel, and others—vehicle refueling and charging property, starting in 2023 and through December 31, 2032.
For educational institutions, the base credit amount is 6% of the cost, limited to a $100,000 credit per item of property. However, institutions can claim a 30% credit for projects meeting prevailing wage and apprenticeship requirements. Like the clean vehicle credit, the entity selling the charging station will get the credit and the credit amount should be taken into consideration in negotiating the price.
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, and
- Stay in compliance if you claim any of these credits or deductions
If you have any questions or need assistance, please reach out to a professional at FORVIS or submit the Contact Us form below.
- 1There is a potential error in the IRA that may prevent some public universities from using the new credit opportunities. Not all public universities may have 501(c)(3) status. Public universities are generally classified as either 1) an integral part of their state, 2) a political subdivision, or a 3) an instrumentality of their state. The first two categories are eligible for the direct pay option, but the third category is currently absent from the eligibility list.