Some Universities to Miss Out on Monetizing Clean Energy Tax Credits

Ambiguity in President Joe Biden’s tax-and-climate law could prevent some public universities from monetizing millions of dollars of clean energy tax credits.

Colleges and universities often don’t have tax liability, so the option for direct pay—or when the credits can be treated as refundable payments—gives institutions with 501(c)(3) status an opportunity to tap into the incentives.

However, not all public universities have 501(c)(3) status, and when the law lists eligible groups, it omits institutions that are considered an instrumentality of the state.

Unless universities are certain they are eligible, many will wait to start projects until there is more clarity in guidance from Treasury and the IRS.

There is “significant risk” to reading instrumentality of state into the statute without guidance, said Ben Davidson, director of tax policy analysis and associate university counsel at the University of North Carolina at Chapel Hill.

The Treasury Department declined to comment on whether an instrumentality of the state is eligible for direct pay ahead of guidance.

Instrumentality of the State

A college or university with no unrelated business income, or UBIT, can make a direct pay election under Section 6417. Institutions with UBIT will be able to claim the tax credit against their taxable income, but if the UBIT is more than the credit, they’ll end up paying the difference.

Depending on how a public university was established in its state, it could be classified as an integral part of the state, a political subdivision, or an instrumentality of the state. Institutions that are an integral part of the state or a political subdivision are eligible for direct pay.

“Each state has its own unique set of tax challenges that have led the landscape to look a little bit more diverse than I think sometimes tax writers remember,” said Lindsey Tepe, assistant vice president of government affairs for the Association of Public and Land-Grant Universities.

Some institutions considered instrumentalities also have separately pursued 501(c)(3) status through their foundations or other affiliated components to ease tax reporting, Tepe said.

However, most schools haven’t needed to know how they are classified, and many don’t know, Davidson said, unless they’ve received a ruling from the IRS. UNC isn’t impacted by the ambiguity in the law, he said.

The direct pay election also lifted the restrictions in Section 50(b)(3) that limited the eligibility of tax credits for tax-exempt organizations. This section includes instrumentalities. However, the restrictions weren’t lifted for taxpayers looking to sell their tax credit using the transferability option in the law, leaving instrumentalities not eligible for direct pay or transferability and unable to monetize many of the credits, Davidson said.

Wait and See

Historically, entities such as public power, public universities, governments, and Native American territory governments have been shut out of tax credits for renewable projects.

But after enactment of the tax-and-climate law, tax-exempt entities are eligible for a variety of credits to use toward clean energy projects such as electric vehicle fleets, clean electricity for buildings, and energy storage.

“It is a little of a chicken-and-egg problem—we need to see what the guidance will allow for,” Tepe said about what projects interest institutions.

The decision of when to monetize the tax credit will depend on the project. For some, a project may not be affordable without direct pay, while others will look after a project is completed.

Colleges and universities are starting conversations on how the credits fit into state and local development plans, Tepe said. Most colleges are on a fiscal year from July 1 to June 30, so they wouldn’t be able to make the election just yet.

The exclusion of the instrumentalities from the eligibility list appears to be a drafting error, industry professionals said, and Treasury has the authority to fix it.

The states of Colorado, Connecticut, Maine, and Pennsylvania also asked in a comment letter for clarity about whether instrumentalities such as public universities and state hospitals will be eligible for direct pay.

“It’s very clear that public universities were intended by Congress to be able to participate in these benefits, and be able to really think about how to plan for their campus communities in more energy efficient ways,” Tepe said.

If direct pay isn’t available, institutions will have to consider tax equity, said Michael Kaercher, a senior attorney adviser and director of the Climate Tax Project at the Tax Law Center at NYU Law.

However, although tax equity is “fairly efficient for big projects,” the kinds of projects public universities and other government entities are going to deploy are likely to be too small for tax equity—or the institution will have to take a haircut on the credit since a large portion will go to the tax equity investor, Kaercher said.