When the Inflation Reduction Act (IRA) was passed in 2022, it ushered in a handful of tax credits for clean energy sources like solar power, wind power or electric vehicles. Historically, those credits may have solely benefitted certain businesses and individuals, but the IRA expanded the credits for nonprofit or tax-exempt organizations to now take advantage of a handful of refundable tax credits by using a new direct pay provision.
Below we outline a few incentives that may benefit your tax-exempt organization, and how your organization can become eligible to receive the credits.
Outlining the tax credits and bonuses available
One of the aims of the Inflation Reduction Act was to accelerate the United States’ transition to clean energy resources and reduce the country’s greenhouse gas emissions. As part of that goal, the IRA added that tax-exempt organizations can now use a new direct pay provision to claim effectively refundable tax credits for qualifying renewable energy property placed in service after December 31, 2022.
Through the direct pay provision, the IRS will provide a base credit with the potential for bonus incentives depending on the project. Refundable credits range from six percent of the property cost, up to 30 percent of the cost, depending on whether or not you meet specific wage or labor requirements with construction of the property. This allows tax-exempt organizations, who normally have limited budgets, to make modern improvements to their infrastructure while recouping a potentially significant portion of the costs.
Additional bonus credit is also available as other criteria are met. If the materials used in the installation of a clean energy property meet certain domestic content requirements, organizations can receive a 10 percent additional credit. Organizations will receive another 10 percent in bonus credits if their project is located in an energy community, which is an area that has historically been dependent on fossil fuel energy jobs like coal mines.
For example, if a retirement facility spends $100,000 on the installation of solar panels meeting the prevailing wage and apprenticeship requirements, they would be eligible for a $30,000 refund once their tax return is filed. This refund total could possibly increase to $50,000 if the project also features domestically sourced materials and is located within an energy community.
Becoming eligible for tax credits
The direct pay election must be made before the tax return due date, including the extension date, and organizations must register the project with the IRS as part of their pre-filing requirements. This pre-registration requirement includes citing background on the clean energy property, listing all tax credits the tax-exempt organizations plan to claim and listing the type of tax return filed by the registrant.
Once registrations are filed, they are valid for one year and must be renewed in order to continue to be eligible for the credits. Organizations will also need to keep their registration number on hand to claim the credit on their future tax return.
The organization will also need to provide that registration number on an original, timely-filed (including extensions) Form 990-T for the year the tax credit could otherwise be claimed. A Form 3800 (General Business Credit) and any forms required to claim the specific credit must also be filed.
What projects are qualified for credits?
For any organizations considering taking advantage of clean energy tax credits, projects must start before January 1, 2025, to qualify. The energy efficient additions that are eligible for tax credits include:
- Qualified solar property
- Qualified geothermal property
- Qualified small wind energy property
- Qualified energy storage technology
- Qualified fuel cell property
Other energy credits available
In addition to the credits stemming from property improvements, the IRA also provides new tax credits for qualified commercial clean vehicles. This credit amount is 30 percent of the cost of each vehicle that doesn’t rely on gasoline or diesel. If organizations opt for hybrid vehicles, the credit drops to 15 percent since those vehicles still use gasoline as a fuel source.
Through the Inflation Reduction Act, the IRS has extended a helping hand to tax-exempt organizations that aim to adopt clean energy solutions for their facility. Contact your RKL advisor to see how these tax credits can apply to your organization’s plans for a greener future.
