Nonprofits and Energy Tax Credits

On June 14, 2023, the IRS issued proposed regulations under the Inflation Reduction Act of 2022 (IRA) providing for nonprofit tax-exempt organizations to benefit from certain clean energy credits that would allow them to elect direct payment from the IRS in lieu of a tax credit. Before IRA, tax credits were generally not useful to nonprofits with no tax liabilities. Direct pay (also referred to as elective pay) changes that. Direct pay treats the tax credit as a payment of tax and results in a tax refund if there are no tax liabilities.

March 5, 2024 UPDATE: Treasury, IRS finalize rules on elective payments of certain clean energy credits under the Inflation Reduction Act

The direct pay option is a game-changer because it gives nonprofits access to the same financial incentives that for-profit companies receive when investing in renewable energy. Most organizations and entities will be eligible for tax incentives of between 30 and 50 percent of the project’s total cost, depending on the project’s location and how much of the hardware content is produced domestically. Projects located in “energy communities” can receive an additional 10 percentage point incentive, and those that use domestically-sourced materials can claim an extra 10 percentage points bonus. Altogether, tax-exempt entities installing clean energy systems in energy community-designated census tracts and low-income residential buildings may receive up to 70 percent of their renewable energy project’s costs.

Direct Pay: Nonprofits Can Now Benefit from Clean Energy Tax Credits (Miguel Yañez-Barnuevo, Environmental and Energy Study Institute)

12 Elective Pay Tax Credits

There are 12 Elective Pay Eligible Tax Credits. Entities that are not eligible for elective pay using these tax credits may sell for cash all or a portion of a tax credit to an unrelated party in the same year the credit is applicable. The payment to the seller would not be included in its taxable income.

  1. Section 30C Alternative fuel refueling property credit
  2. Section 45(a) Renewable electricity production credit (PTC) (including solar)
  3. Section 45Q Credit for carbon oxide sequestration
  4. Section 45U Zero-emission nuclear power production credit
  5. Section 45V Credit for production of clean hydrogen
  6. Section 45W Qualified commercial clean vehicles credit
  7. Section 45X Credit for advanced manufacturing production
  8. Section 45Y Clean electricity production credit
  9. Section 45Z Clean fuel production credit
  10. Section 48 Energy credit (ITC) (including solar)
  11. Section 48C Qualifying advanced energy project credit
  12. Section 48E Clean energy investment credit

Practical Uses

A nonprofit organization may be able to use one or more of these tax credits if they are investing in (among other things):

  • installing solar panels
  • making certain other improvements to their existing facilities
  • building new energy-efficient facilities
  • installing vehicle charging stations

Using solar panels as an example, it’s worth first reviewing some of the pros and cons of turning to a solar energy system. Then consider whether a principal con, the cost, is mitigated by an applicable tax credit.

There are actually two tax credits available for nonprofits and other entities that purchase solar energy systems:

  1. The investment tax credit (ITC) is a tax credit that reduces the federal income tax liability for a percentage of the cost of a solar system that is installed during the tax year.
  2. The production tax credit (PTC) is a per kilowatt-hour (kWh) tax credit for electricity generated by solar and other qualifying technologies for the first 10 years of a system’s operation. It reduces the federal income tax liability and is adjusted annually for inflation.

According to the federal Office of Energy Efficiency & Renewable Energy:

Generally, project owners cannot claim both the ITC and the PTC for the same property, although they could claim different credits for co-located systems, like solar and storage, depending on what further guidance is issued by the Internal Revenue Service (IRS). …

Solar systems that are placed in service in 2022 or later and begin construction before 2033 are eligible for a 30% ITC or a 2.75 ¢/kWh PTC if they meet labor requirements issued by the Treasury Department or are under 1 megawatt (MW)[5] in size. …

The ITC is an upfront tax credit that does not vary by system performance, while the PTC can provide a more attractive cash flow, as the tax credits are earned over time. Whether to choose the ITC or the PTC depends largely on the cost of the project, the amount of sunlight available, and whether it is eligible for any bonus tax credits. …

While the PTC is calculated based on the electricity produced by a system, the ITC is calculated based on the cost of building the system, so understanding what expenses are eligible to include is important in determining how much of a tax credit the system is eligible for. …

To qualify for the full ITC or PTC, projects which commenced construction prior to January 31, 2023, must satisfy the Treasury Department’s labor requirements: all wages for construction, alteration, and repair—for the first five years of the project for the ITC and the first ten years of the project for the PTC—must be paid at the prevailing rates of that location. In addition, a certain percentage of the total construction labor hours for a project must be performed by an apprentice. The percentage increases over time, starting at 10% for projects beginning construction in 2022, 12.5% for projects beginning construction in 2023, and 15% for projects beginning construction after 2023.

Projects can correct the prevailing wage requirements, if they were originally not satisfied, by paying the affected employees the difference in wages plus interest and paying a $5,000 fee to the Labor Department for each impacted individual. The apprenticeship requirements also can be satisfied if a good faith effort was made to comply or if a penalty is paid to the Treasury in the amount of $50/hour of non-compliance. Both penalties increase if the requirements are intentionally disregarded.

Federal Solar Tax Credits for Businesses

Some Monetization Steps

To monetize applicable credits, an authorized representative of the entity must:

  • use the online IRA/CHIPS Pre-filing Registration Tool (available here) to register the intention to make an elective payment or transfer election; and
  • include registration numbers received through this online tool on the entity’s tax return (the Form 990-T, which must be e-filed).

Both the elective payment election and the transfer election must be made on a timely filed return (including extensions). For a calendar year filer, the due date would typically be May 15, with an extended due date of November 15 if a timely Form 8868 is filed.

A Form 3800 (General Business Credit) must also be filed with the Forms 990 and 990-T. Other forms relating the the specific tax credit may also need to be timely filed.

According to IRS guidance:

Even though registration is not possible prior to the beginning of the tax year in which the credit will be earned, the IRS recommends that taxpayers register as soon as reasonably practicable during the tax year. The current recommendation is to submit the pre-filing registration at least 120 days prior to when the organization or entity plans to file its tax return on which it will make its election. This should allow time for IRS review, and for the taxpayer to respond if the IRS requires additional information before issuing the registration numbers.

IR-2023-249, Dec. 22, 2023

While an outside professional may be able to help with the process, the Registration Tool portal requires an attestation that the person providing the information is a corporate officer or someone with legal authority to execute the authorization on behalf of the registering entity. See IRA/CHIPS Pre-Filing Registration Tool User Guide and Instructions

Additional Resources

Clean Energy Tax Credits Made Available to Tax-Exempt and Governmental Entities (Davis Wright Tremaine)

Renewable Energy Tax Credits under the Inflation Reduction Act: Opportunities for Exempt Organizations (Blank Rome)

Tax-exempt organizations: Clean energy incentives and direct pay (RSM)

How Tax-Exempt Entities Can Access Cash Payments from Renewable Energy Credits (Moss Adams)

Climate law renewable credits hit nonprofit roadblock (E&E News)

KPMG Webcast (2022)

Elective Pay and Transferability (IRS)