How Exempt Organizations Can Benefit from Clean Energy Incentives

February 5, 2024
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Key Takeaways

  • Exempt organizations are eligible for clean energy credits as part of the Inflation Reduction Act.
  • Applicable entities must pre-register with the IRS to elect direct payment.
  • The direct payment election is made in connection with the applicable entity’s annual tax return.

The Inflation Reduction Act (IRA) provides many new financial incentives encouraging investment in clean energy resources. Nonprofit entities can participate in these credits for the first time through electing to receive direct payments.

Tax-exempt entities, with tax years beginning after December 31, 2022, such as charitable organizations, colleges and universities, hospitals, and governments may elect to receive a direct payment of the credit amount.

Typically, tax-exempt organizations do not benefit from tax credit incentives because they do not have a tax obligation to offset with the credit. However, the IRA allows exempt organizations to benefit from clean energy credits by receiving the equivalent credit amount as a direct payment. With direct pay (also known as elective pay), applicable entities can receive financial incentives by investing in eligible energy property or participating in eligible clean energy production activities.

These new potential financial incentives may encourage exempt organizations to explore clean energy options that may not have been previously considered.

What is an Applicable Entity Under the Inflation Reduction Act?

Applicable entities include:

  • Organizations exempt from tax under Section 501(a), including Section 501(c) and Section 501(d) States and political subdivisions
  • Indian tribal governments
  • Alaska Native Corporations
  • The Tennessee Valley Authority
  • Rural electric co-operatives
  • U.S. territories and their political subdivisions (some limitations apply)

What Property is Eligible for Direct Payment?

Property is eligible for the credit in the year it is placed in service and must generally be owned and used by the applicable organization to conduct activities. The credit requirements for applicable entities are the same requirements for taxable entities.

Available credits include:

  • Energy Credit (Section 48): Investment in renewable energy projects, including fuel cell, solar, geothermal, small wind, energy storage, biogas, microgrid controllers, and combined heat and power properties.
  • Clean Electricity Investment Credit (Section 48E): Replaces the energy credit for facilities that begin construction and are placed in service after 2024.
  • Renewable Electricity Production Credit (Section 45): Electricity production from eligible renewable sources, including wind, biomass, geothermal, solar, small irrigation, landfill and trash, hydropower, marine, and hydrokinetic energy.
  • Clean Electricity Production Credit (Section 45Y): Replaces the Renewable Electricity Production Credit for facilities that begin construction and are placed in service after 2024.
  • Commercial Clean Vehicle Credit (Section 45W): Purchase of qualifying vehicles, including passenger vehicles, buses, ambulances, and certain other vehicles for use on public streets, roads, and highways.
  • Credit for Alternative Fuel Vehicle Refueling/Recharging Property (Section 30C): Investment in alternative fuel vehicle refueling and charging property, located in low-income and non-urban areas. Refueling Property Credit qualified fuels include electricity, ethanol, natural gas, hydrogen, and biodiesel.

What is the Amount of the Credit?

The credit amount is calculated based on the amount of clean energy produced (production credit) or by determining the qualified tax cost basis (investment tax credit) and applying the applicable rate or percentage.

How Do Exempt Organizations Apply for Direct Payment?

Direct pay is an irrevocable election made on the organization’s tax return. Before making the election, the entity must complete a series of steps, which includes registering the applicable project on the IRS Portal. Publication 5884 provides step-by-step instructions to create an account and register a project.

Are there Additional Considerations for Exempt Organizations Under the Inflation Reduction Act?

The direct pay provision is available when the organization's taxable year begins after December 31, 2022. Organizations with fiscal year ends must give extra attention to projects placed in service during 2023.

Entities making the direct pay election must properly substantiate project costs and credit eligibility. Completing the pre-registration process and receiving direct payment after filing the entity’s tax return does not guarantee credit eligibility and repayment may be required if the IRS determines the entity is not eligible under audit.

The Inflation Reduction Act provides new financial incentives for investing in and producing clean energy. For the first time, these credits are available for exempt organizations. As exempt organizations consider clean energy projects, it is important to substantiate the eligibility of clean energy projects and complete the proper documentation.

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About the Author(s)

Photo of Colette Gagnet

Colette Gagnet, CPA

Director/Energy Credits & Incentives

Colette is a consultant with over 16 years of experience providing tax consulting services and analyzing complex tax situations from both sides of the desk. Colette helps our clients understand the ever changing landscape of tax credits and incentives. She works with both tax-exempt and taxable organizations to understand available incentives.

Kim Hunwardsen

Kim C. Hunwardsen, CPA

Partner/Tax-Exempt Organizations Practice Leader
Kim delivers tax services to healthcare providers and nonprofits, working closely with tax-exempt organizations to provide comprehensive tax consulting, planning and compliance expertise. She joined Eide Bailly in 2002 and guides clients through changes in tax reporting requirements and tax law. She assists nonprofits in formations of new entities, annual compliance requirements and all other tax-related issues.
Trina Pinneau photo

Trina Pinneau

Senior Manager
Trina has more than 10 years of public accounting experience providing tax consulting services and analyzing complex tax situations. She has spent the majority of her time in the credits and incentives space with a focus on energy credits and excise taxes. Trina also has experience in tax controversy and accounting methods. In joining Eide Bailly's National Tax Office Trina is focusing her efforts on energy efficiency incentives while being a resource for the excise and tax controversy team.