Introduction:
In 2022, Congress passed the Inflation Reduction Act (“IRA”) which greatly increased availability of tax credits for renewable energy projects for tax-exempt organizations. Nonprofit organizations can now benefit from a wide range of tax incentives to make their practices more eco-friendly. The following is a brief overview of the new and substantial tax credits available to nonprofits.
The Investment Tax Credit for Energy Property (“ITC”):
For projects beginning construction prior to January 1, 2025, the IRA provides a potential ITC of 6% (base amount) to up to 30% or higher of qualified investment costs of a renewable energy project. Additionally, the credits can increase up to 50% if the projects meet certain domestic content or location requirements. Fuel cell, solar, geothermal, small wind, energy storage, biogas, microgrid, controllers, and combined heat and power properties are examples of projects eligible for this tax credit.
These credits can increase up to 50% in three ways:
The ITC is available in the tax year when the project is first “placed in service.” (e.g. for a solar project, when it is first connected to the grid.)
There is also a 5 year recapture period for the ITC. For example, if the organization sells the solar system back a year after it is placed in service, it will be required to pay back 80% of the credit. If it sells it back in 2 years, it will be required to pay back 60% of the credit, and so on.
Direct Pay Reporting
One main benefit of the ITC is that nonprofits installing eligible clean energy upgrades can benefit from direct pay, or elective pay, if they have placed into service such upgrades after January 1, 2023. The IRA now gives nonprofits the option to receive a direct payment from the Internal Revenue Service (“IRS”) in lieu of a tax credit. Nonprofits may use the direct pay option to receive a lump sum of cash grants equal to the credit amount, helping to offset costs over the next decade.
The Renewable Electricity Production Tax Credit (PTC):
Alternatively, organizations can elect to apply for the PTC. The 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. The PTC amount varies depending on the project’s start date, wages, apprenticeship, domestic content requirements, and location in an energy community. Facilities generating electricity from renewable sources are eligible for the PTC for 10 years, allowing for tax benefits to be consistently applied over time.
Qualified Commercial Clean Vehicles Credit:
Nonprofits may also receive a tax credit for investing in a new fleet of commercial clean vehicles. For qualified vehicles under 14,000 pounds, the maximum credit is $7,500, and $40,000 for all other vehicles. While the credit amount is capped, there’s no limit on the number of vehicles eligible for the credit.
Alternative Fuel Vehicle Refueling Property Credit:
Nonprofits in low-income communities can also receive a tax credit for alternative fuel vehicle refueling and charging property. The IRA now allows nonprofits to claim a 6% base credit up to a maximum credit of $100,000 for the installation of alternative fuel vehicle refueling and charging property in low-income and rural areas.
IRS Pre-Filing Registration Tool
The IRS recently announced that qualifying tax-exempt organizations can register through the IRA/CHIPS Pre-Filing Registration Tool in order to receive a registration number. Interested taxpayers should complete and submit the pre-filing registration request no earlier than the beginning of the tax year in which the taxpayer they will earn the credit it wishes to monetize with an elective payment election or transfer election.
Conclusion:
Nonprofit organizations now have many opportunities to leverage the IRA’s clean energy tax incentives for various projects, from building improvements to vehicle fleet upgrades. This is a new and exciting development that can significantly help nonprofits looking to develop renewable energy projects and reduce their carbon footprint in the years to come. Please feel free to reach out to LCW’s team for any additional questions regarding these new tax incentives. For more information, see 26 U.S. Code § 48; See IRS Notice 2024-9, available at: https://www.irs.gov/pub/irs-drop/n-24-09.pdf; https://www.irs.gov/credits-deductions/register-for-elective-payment-or-transfer-of-credits