Green Construction Pays in Higher Education Under the IRA
Universities now have more incentive to invest in energy-efficient construction and other practices thanks to the Inflation Reduction Act (IRA). Institutions could see financial benefits by leveraging incentives often used by businesses when investing in energy-efficient buildings.
The IRA, signed into law in 2022, provides a range of benefits for tax-exempt entities such as corporations, governments and universities. Two of those benefits are through IRC Sections 6417 and 179D—green energy tax incentives designed to encourage entities to invest in clean energy and minimize the environmental impact of new construction and improvements to existing structures.
Section 6417 – Direct Payments
Section 6417 provides tax-exempt entities the opportunity to benefit from certain tax incentives aimed at promoting investment in clean energy. Specifically, it allows applicable entities to be paid these credits directly by the government in the absence of any federal tax liabilities.
Applicable entities are defined as follows (with higher education generally falling under one of the first three categories):
- Tax-exempt entities
- Government entities
- State and local governments
- The Tennessee Valley Authority
- Indian tribal governments
- Alaska Native Corporations
Over a dozen credits aimed at environmental friendliness can be claimed under the IRA’s provisions. These include credits for alternative fuels, clean commercial vehicles, technology neutrality and more, with each having its own calculation formula. An eligible institution can receive these benefits even if it doesn’t have unrelated business taxable income (UBTI).
For example, installing solar panels would fall under the Investment Tax Credit. If prevailing wages are paid and U.S.-sourced materials are used, your institution could get a payment from the government of up to 40-50% of the costs, depending on your location.
More complex power purchase agreements with for-profit entities could maximize tax incentives to multiple parties through accessing depreciation as well the credit (whereas the tax-exempt entities can only access a direct-pay on the credit).
Section 179D – Indirect Benefits
The IRA also opens the door for the use of IRC Section 179D. This popular deduction covers improvements to an HVAC system, hot water system, interior lighting system or the building’s envelope. Normally this deduction applies to the architecture firm (or other designing party) working on such projects. However, the IRA expands eligibility to include buildings/properties owned by tax-exempt organizations and placed in service after January 30, 2023.
While the financial benefit in this instance is less direct, it can still make a significant impact. With 179D, the party designing the project could potentially receive a tax deduction of up to $5 per square foot if using prevailing wages and meeting certain energy consumption levels. The criteria for measuring improvements in energy efficiency consumption is based on standards from 2007. So it might not be as difficult as you think to meet these requirements.
With the IRA provision, universities can now assign the tax deduction to their design firm. They can then in turn ask the firm for a discount based on that deduction.
The IRS is still working on the application process for these requesting these green energy benefits. Meanwhile, your institution can take steps now to maximize the tax benefits under 6417 and 179D.
Energy-efficient building design and construction – Keep green methods, materials and design in mind when building new structures.
Building retrofits and upgrades – Upgrading existing buildings to improve energy efficiency does more than lower your power bills. It can also lead to direct payments under 6417 or a discount from your builder under 179D. Incorporate energy-efficient design features, such as insulation, high-efficiency HVAC systems and efficient lighting systems, to maximize available benefits.
Use of renewable energy sources – Installing renewable energy systems, such as solar or wind, can also help you qualify for tax credit payments under 6417.
Thoughtful analysis and planning – Conduct an energy-efficiency analysis of your buildings to identify areas to improve energy efficiency and possibly take advantage of 179D.
Thorough documentation and diligent recordkeeping – Keep detailed records of all energy efficiency and renewable energy measures taken. These will be needed to support tax credits/deductions claimed under both initiatives. This includes providing accurate calculations of the expected energy savings to support tax credit claims. Tracking prevailing wages paid and source of materials used will also help to maximize the benefits.
Partnering with experts – Engage with energy efficiency experts to identify the best strategies for your university. This helps you maximize financial benefits and ensure compliance with regulations.
Another expert to consult: your higher education CPA. They’ll have extensive knowledge of industry financial conditions and operations, along with access to up-to-the-minute tax information. Leveraging that partnership can help you reap these new tax benefits while staying in compliance.
All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.
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