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Direct Pay for Tax Exempt Entities making Renewable Energy Investment

Written by Zana Tomich on January 24, 2023 Category: General Counsel and Advice, Nonprofits, Religious Institutions

The Inflation Reduction Act (“IRA”) was signed into law on August 16, 2022. Despite the legislation’s name, it’s primarily a green energy bill that allocates $369 billion to fighting climate change by incentivizing a clean energy economy.

One of the most significant aspects of the IRA is that, unlike other clean energy bills focused on individual and for-profit company incentives, it contains tax provisions that financially incentivize nonprofit organizations to make renewable energy investments.

In the past, renewable energy tax credits were generally only available to individuals and entities that had taxable income to offset. Since many entities like local governments houses of worship, hospitals, and higher education institutions are tax-exempt, the pre-IRA federal renewable energy tax incentive structure did not provide them an opportunity to benefit.

Direct Pay Under the IRA

For tax-exempt entities, the IRA includes a new “direct pay” provision that allows tax-exempt entities to immediately monetize applicable tax credits (the production tax credit and/or the investment tax credit) by claiming them as direct payments from the U.S. Treasury.

The types of credits that state, local, and tribal governments, as well as non-profit organizations and other tax-exempt entities may elect to receive as direct payments include:

? Alternative Fuel Refueling Property Credit (§30C)
? Production Tax Credit (§45, §45Y)
? Credit for Carbon Oxide Sequestration (§45Q)
? Zero-Emission Nuclear Power Production Credit (§45U)
? Credit for Production of Clean Hydrogen (§45V)
? Credit for Qualified Commercial Clean Vehicles (§45W, tax-exempt entities only)
? Advanced Manufacturing Production Credit (§45X)
? Clean Fuel Production Credit (§45Z)
? Investment Tax Credit (§48, §48E)
? Advanced Energy Project Credit (§48C)

In practical terms, and assuming the appropriate steps are taken, what this means is that if a tax-exempt house of worship or hospital invests $200,000 in a new solar array project which is eligible for a 30% tax credit, that nonprofit will receive $60,000 directly from the U.S. Treasury. And the amount of the credit can increase based on certain factors, such as whether the project resources are sourced domestically and if the project is being built in a low-income neighborhood, among other things. It’s important to keep in mind, however, that the IRS is still reviewing the impact of the IRA and has not yet issued its final guidelines, so the exact parameters of the credits is subject to change.

But what is clear is that the IRA is a game changer for tax-exempt entities who want to invest in renewable energy, or who are looking to repurpose excess property. The availability of direct payments for tax credits means that the “payback” period for any renewable project can be greatly reduced, which means we’ll see more of them. And that’s great news not only for the entities making the investments, but also for our environment.

To learn more about the IRA’s new direct pay provision for tax-exempt entities, please contact Zana Tomich.

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