The Inflation Reduction Act of 2022 (the Act) includes numerous income tax credits promoting a cleaner environment through support for the alternative energy economy, including solar, wind, geothermal and other forms of renewable energy. The credits — many of which have existed previously in some form — provide expanded tax-saving opportunities for those that participate in such activities. So, what’s new for nonprofits? The Act introduces “direct pay” for exempt organizations, allowing those generating qualifying credits to receive cash payments directly from the IRS. The creation of this new payment mechanism combined with an expansion of the underlying credits is expected to spur consideration of alternative energy investments by nonprofits.
Inflation Reduction Act tax credit opportunities for nonprofits
Two of the credits qualifying for the direct-pay process relate to the generation of electricity from renewable resources. One credit is calculated based on the amount of electricity produced annually while the other is calculated based on the investment into the qualifying equipment.
The Section 45 credit (the production tax credit or PTC) is earned based on the energy output of a qualifying alternative energy facility. Specific types of renewable resources must be used, including:
- Wind
- Solar energy
- Closed loop and open loop biomass
- Geothermal energy
- Small irrigation power (less than 5 megawatts)
- Municipal solid waste
- Qualified hydropower production
- Marine and hydrokinetic renewable energy
The Sec. 48 energy credit (investment tax credit or ITC) is earned when a qualifying investment in energy property is placed in service. Possible types of energy property mirror those eligible for the PTC but have been expanded in significant ways. Eligible equipment includes:
- Qualified small wind energy property
- Solar equipment used to generate electricity, to heat or cool a structure, or to provide solar process heat
- Geothermal equipment used to produce, distribute, or use energy from a geothermal deposit
- Qualified fuel cell property or microturbine property
- Combined heat and power property
- Equipment using the ground or groundwater as a thermal energy source to heat a structure or as a thermal energy sink to cool a structure
- Waste energy recovery property
- Energy storage technology
- Qualified biogas property
- Microgrid controllers
The expanded PTC and ITC discussed above are generally applicable to equipment placed in service after Dec. 31, 2022, and for which construction begins before Jan. 1, 2025. Beginning in 2025, two similar tax credits — a PTC, the Sec. 45Y Clean Electricity Production Credit; and an ITC, the Sec. 48E Clean Electricity Investment Credit — will take effect. Such credits will also qualify for the direct-pay mechanism.
How will nonprofits qualify for direct-pay credits under the Inflation Reduction Act?
A key provision of the Inflation Reduction Act was the creation of the direct-pay mechanism under Sec. 6417. This applies to 12 income tax credits, including the four discussed above. At its core, this rule allows applicable entities, including tax-exempt organizations, to receive tax refunds through a deemed overpayment of tax. Refunds will equal the full value of computed credits, so nonprofits will be able to receive the full economic benefit of their credits. The overall structure of this mechanism is outlined in the statutory text, but the specific forms and filing process haven’t yet been announced. The IRS is expected to release guidance outlining the specifics of the direct-pay process in the coming months.
At this time, it seems likely that organizations that own qualifying real estate and tangible personal property will be in the best position to benefit from the credits and to access the credits via direct pay. It may seem like this list of credits won’t apply to a lot of organizations, but a closer look reveals that many organizations may be pleasantly surprised as details become available. It seems likely that many nonprofits will get an additional tax benefit out of things as simple as solar panels. Nonprofits with campuses, such as health systems, senior living communities, higher education institutions, and municipalities, may find that some type of applicable power plant or energy production facility is suitable for their property.
Watch for guidance on the Inflation Reduction Act for nonprofits
While the process for direct pay requires clarification, there’s enough information available for nonprofits to start considering these credits in their planning. Organizations should consider possible PTC and ITC benefits when assessing potential options for installing or upgrading power-generating resources. Other tax credits enhanced by the Inflation Reduction Act, such as those under Sec. 30C for installing electric vehicle chargers, might also be considered. Moving forward, the forthcoming IRS guidance is expected to help finalize plans as definitions are clarified and the process for claiming credits is outlined in detail.
