As students and communities around the US mount pressure on college campuses to become more sustainable, the Inflation Reduction Act of 2022 (IRA) offers new incentives for universities to go green. This comes as a major relief to higher education institutions which have, so far, been excluded from monetizing tax incentives that have spurred climate action across the private sector in the last decade.
Many universities have struggled to finance clean energy projects to achieve their climate goals in recent years. With the IRA’s amendments, tax-exempt entities like educational institutions can finally leverage formerly inaccessible tax credits to support clean energy initiatives using the pathways of transferability and direct elective pay.
Transferability of Incentives for Green Buildings
Transferability allows non-profit organizations such as higher education institutions to allocate tax benefits to for-profit entities that would be reflected in reduced tax-adjusted pricing. This is particularly relevant for universities that are planning environmentally responsible and resource efficient new constructions or building retrofits (i.e., green constructions).
Tax deductions under S. 179D—previously only available to for-profits for investments in energy efficient HVAC, lighting, water management systems, and changes to a building’s façade and roof —can now be leveraged by universities as well, so long as it leads to a 25% reduction in energy use, compared to the baseline standard from the American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE). The tax deduction for energy savings can then be transferred to a tax-paying partner which can pass a portion of the benefit through to the university by accounting for it in their cost structure.
Tax incentives for energy efficient constructions differ based on the extent of energy savings and satisfaction of optional conditions. These optional provisions include the requirement to pay laborers wages at prevailing market rates and the requirement to hire one apprentice for every four laborers and assign them 10% – 12.5% of total work hours. For example, if a university hires eight contractors to construct a building with high efficiency windows, greater insulation, and other energy saving measures, the team should also include two additional apprentices that are trained for at least an hour a day, for the university to obtain additional tax incentives.
Direct Pay of Tax Credits for Campus Solar and EVs
The IRA also extends the benefits of certain clean energy investment tax credits to tax-exempt organizations through direct payments. Educational institutions can take advantage of these to install rooftop/carport solar on campus, purchase electric vehicles (EVs), and install EV charging stations. The direct pay provision allows universities to receive a direct cash payment from the government equal to the applicable tax credits, provided that the clean energy investment is owned by the institution. The IRA also allows for bonus tax credits for qualifying clean energy investments if they meet prevailing wage, apprenticeship, or domestic content requirements.
Potential Financial Impacts
Tax deductions for green constructions range from $0.5 – $5 per square feet (capped at the total cost of investment) as highlighted in the table below. The extent of the cost rebate that a university could obtain would depend on: (i) negotiations with their for-profit partner; and (ii) their partner’s potential tax savings. It is also important for universities to have these discussions early in the building design process and to work with contractors or designers who have previous experience in projects that meet energy savings standards of S.179D. By also meeting optional wage and apprenticeship conditions, they can greatly increase their incentives’ potential financial benefits.
|Tax deduction per square foot||At least 25% more in energy savings compared to baseline||At least 50% more in energy savings compared to baseline|
|No optional requirements met||$0.50 per sq. ft. increasing by $0.02 for every additional 1% of energy savings up to 50%||$1 per sq. ft.|
|Meets prevailing wage + apprenticeship requirements||$ 2.5 per sq. ft.||$ 5 per sq. ft.|
Direct payment of tax credits would differ based on the nature of the clean energy project and the type of tax credit claimed. Some examples have been set out in the table below. It is also straightforward in terms of the benefits that it confers on the claimant university as it does not involve sharing benefits with third parties. However, to leverage these benefits, the higher educational institution will need to own the clean energy project and cannot lease it from another entity.
|Tax credit (examples)||Solar production tax credit||Solar investment tax credit|
|No optional conditions met
|0.55 cents per kWh produced||6% of total investment|
|Meets prevailing wage + apprenticeship requirements
|2.75 cents per kWh produced||30% of total investment|
|Meets domestic content requirement||An additional 0.3 cents per kWh produced if wage + apprenticeship requirements met.
Additional 0.1 cent per kWh produced if wage + apprenticeship requirements not met.
|An additional 10% if wage + apprenticeship requirements met.
An additional 2% if wage + apprenticeship requirements not met.
Timelines and Processes for Taking Advantage of Green Construction Incentives
For tax incentives related to green constructions, the university should have discussions with the designer/contractor during the budgeting/planning stage so they can account for claiming the tax deduction and passing the benefit through to the university by including it in their cost structure. To be eligible for the tax incentive, a third-party engineer-verified study must be conducted indicating at least a 25% increase in energy savings compared to the ASHRAE baseline standard. An allocation letter should be used to assign the deduction to the designer, who must apply for the deduction in the taxable year the property is placed in service.
To receive the ‘direct payment’ incentive applicable to clean energy investments (campus solar, EVs), temporary regulations require educational institutions to register for pre-filing on the IRS portal, which includes sharing information on applicable property and applicable tax credits. The IRS will provide a registration number, which should be included in tax returns to claim a direct cash payment.
The new incentives under the IRA provide unique funding opportunities for universities to explore as they implement projects to achieve their climate goals. To effectively benefit from these initiatives, higher education institutions could consider developing and circulating internal guidance on relevant tax benefits to consider for future constructions and clean energy projects. This would help the various departments involved in project implementation prioritize sustainability in their discussions with potential contractors as they identify the equipment, materials or approaches to build a greener and lighter-footprint campus.