Understanding IRA Clean Energy Tax Credits For Non-Profits
Clean energy adoption in the United States has primarily been driven by financial incentives, notably through mechanisms such as the Investment Tax Credit (ITC) and the Production Tax Credit (PTC).
These tax credits effectively reimburse project expenses, serving as valuable tools for incentivizing clean energy initiatives.
However, until the enactment of the Inflation Reduction Act (IRA) of 2022, these benefits were exclusively accessible to taxable entities.
The sole issue was that organizations exempt from taxes, by definition, couldn’t qualify for tax credits, rendering the incentive unavailable for them.
This exclusionary framework stopped tax-exempt entities, including nonprofits, religious institutions, and educational establishments, from directly accessing these incentives.
While these entities could still engage in solar adoption through leasing or power purchase agreements (PPA), direct utilization of the ITC remained out of reach.
However, a notable provision within the IRA has brought about a significant shift to this arrangement; that provision is direct pay.
Direct pay enables nonprofits to receive a payment equivalent to the total value of tax credits upon the successful completion of qualifying clean energy projects.
Explaining the Inflation Reduction Act (IRA):
The Inflation Reduction Act aims to reduce America’s greenhouse gas emissions, hastening the transition to cleaner energy sources.
The law introduces 12 different types of credits designed to encourage and facilitate environmentally friendly actions such as buying electric vehicles or installing solar panels. These credits incentivize people to make sustainable choices so they contribute to a cleaner and healthier environment.
Mainly, nonprofits are targeted to benefit from these initiatives, with credits accessible as refund elections on their Form 990 tax returns.
For instance, nonprofits can now receive direct pay of at least 30% of solar project costs, whereas other entities receive this incentive as a tax credit.
For example, suppose a public clinic invests $100,000 in solar panel installation and its expenses align with the program. In that case, it potentially qualifies for a $30,000 refund upon making the appropriate election on its Form 990.
The Investment Tax Credit (ITC) has been raised to a 30% baseline credit for projects initiated before 2033.
This credit applies to projects of any size meeting wage and apprenticeship standards.
Additionally, projects may qualify for up to six bonus credits, potentially increasing the ITC value to 70% of installation costs.
These bonus credits include incentives for projects in low-income communities, tribal lands, low-income residential projects, and low-income economic benefit projects. Two additional 10% credits are stackable, available for projects in “energy communities” or meeting domestic manufacturing requirements.
For more detailed information on these bonus credits, individuals can refer to fact sheets published by Clean Energy Group.
Which Projects Are Eligible?
The ITC previously required energy storage to be installed alongside solar or wind power systems for it to qualify.
However, a recent change has now permitted standalone storage projects to be eligible, alongside solar-only and solar combined with storage projects.
This adjustment broadens access to storage, which is particularly useful for organizations looking to enhance existing solar setups with resilient battery storage. Eligible projects include solar, energy storage, microgrid controllers, small wind projects, fuel cells, biogas, and combined heat and power properties.
However, there will be changes to eligibility requirements for projects put into service after December 31, 2024, as outlined in Tax Code Section 48E. By 2025, eligible projects must produce electricity with zero greenhouse gas emissions, such as solar and wind, while covering qualified energy storage technologies.
Energy storage, defined in 26 U.S. Code 48E(c)(2) and 48(c)(6), involves systems that store and deliver energy for electricity conversion, with a minimum capacity of 5 kilowatt-hours, excluding storage primarily used for transportation purposes.
Moreover, the IRA has introduced a new framework for transferable tax credits, providing a valuable opportunity for nonprofits to finance their projects. This transferability empowers the entity to sell their tax credits to a third party for cash.
Where to Apply For These Tax Credits As a Non-Profit?
To apply for these IRA clean energy tax credits online, the applicable entity must:
- Complete the pre-filing IRS internet portal: The entity must access the portal and provide the necessary information to pre-file for the credit.
- The entity must file Form 990 or Form 990-T, depending on their tax status.
- Complete Form 3800 (General Business Credit) to claim the credit.
- Complete Form 8835 (Renewable Electricity Production Credit) to calculate the credit amount.
Word of Caution:
The Treasury guidance introduced the notion of excessive benefit, which was not initially present in the IRA bill. This notion aims to prevent nonprofits from benefiting excessively from direct pay.
Specifically, if nonprofits receive a grant or donation explicitly marked for a solar project that covers 100% of costs, the organization becomes ineligible for direct pay.
Even if the energy efficiency grants for nonprofits cover a part of the costs, it affects the direct pay amount.
Simply put, the sum of grant/donation and direct pay can’t surpass the solar project’s purchase price. Excess funds over $70,000 from grants/donations are deducted from the $30,000 direct pay tax credit.
Again, this rule applies solely to the grants designated for green causes, not general contributions.