New Rules Offer Tax-Exempt Entities Big Discounts on Clean Energy

Local governments, school districts, and nonprofits are now eligible for cash refunds on solar, EVs, and other clean energy investments through newly finalized guidelines from the Inflation Reduction Act.

Carynton Howard, Cary Ritzler, and Chris Carnevale | March 20, 2024 | Clean Energy Generation, Electric Vehicles, Energy Efficiency, Energy Policy, ETS Collaborative, Solar

This blog post is for general informational purposes only, and is not tax advice. Please consult with a tax professional before making decisions regarding the contents of this blog.

This blog post was updated on July 2, 2024 to include new IRS office hours.

Imagine waking up one day and finding your community transformed. Instead of smelly diesel buses roaring through your neighborhood, clean electric buses are whispering through the streets and the kids are arriving to school breathing clean air.  City halls, public libraries, health departments, and hospitals are harvesting clean energy from the sun, and storing it up in batteries to use when the sun goes down or the power goes out. Kids at school are learning in comfort year-round, with efficient heat pumps that keep buildings warm in winter and cool in summer. Your air is cleaner, the buildings are tighter and healthier, and your community is saving money by avoiding expensive fuel costs. Best of all, you know that your town is doing what it can to address climate change.

… Now imagine that all of this came at a fraction of the cost, because your community jumped on the opportunity to receive direct cash payments under the IRS’s newly released rules for elective pay for clean energy tax credits

Local governments, school districts, and nonprofit organizations throughout the Southeast are now eligible for a substantial cash refund on solar panels, electric vehicles, and other clean energy investments through newly finalized guidelines from the Inflation Reduction Act (IRA). For many years, tax credits that incentivize clean energy for residents and businesses have not been available to tax-exempt entities, but the IRA now extends those credits to government entities and nonprofit organizations to help them take on a larger role in creating a clean energy economy. The landmark law includes a provision for elective pay, also known as direct pay, which will make installing and producing clean energy more accessible.

Now that the Internal Revenue Service (IRS) has finalized their rules for the provisions, it’s time to get the word out. 

Elective pay gives tax-exempt entities like nonprofits, government agencies, and rural electric cooperatives the opportunity to receive cash payments from the IRS for the full value of certain clean energy tax credits. This is great news for those with little to no tax liability, as they were previously ineligible for clean energy investment and production tax credits. 

Who is Eligible?

The eligible entities include the following:

  • State, local, and territorial governments
  • Federally recognized tribal governments
  • Agencies and instrumentalities of state, local, territorial, and tribal governments  including school districts, economic development agencies, and public universities and hospitals
  • Rural Electric Cooperatives
  • Tennessee Valley Authority
  • Churches, charities, homeowners associations and other tax-exempt entities 
  • Alaska Native Corporations

What Can Communities Do with the Tax Credits?

Eligible entities can use elective pay to cover a portion of the cost for a range of clean energy investments, including solar, electric vehicles, and electric vehicle chargers. The IRA specifically outlines 12 tax credits that tax-exempt entities can take advantage of, although just a handful of the options would be attractive to most tax-exempt entities.

For example, your local school district could use the Commercial Clean Vehicle Credit to purchase electric school buses. Through direct pay, the school district would receive a refund of up to $40,000 or 30% of the total cost, whichever is lower, for each vehicle. Your city government could use the same credit to purchase electric cars and light duty trucks to begin transitioning the city’s vehicle fleet to low-cost electric vehicles, and save $7,500 on each vehicle. For more information on direct pay for electric vehicles, refer to this SACE blog post

Another example is that your county government might use the Investment Tax Credit (ITC) to put rooftop solar on the local library. The project would be eligible for a base tax credit of 30% of the cost of the installation (as long as certain conditions are met). One of the major stipulations of the solar ITC is that projects meet prevailing wage and apprenticeship requirements to receive the 30% base credit. This means that not only will the local government receive the tax credit, they can also help boost the local economy by providing good-paying jobs.

Additionally, tax-exempt entities can also use elective pay to benefit from the bonus credits that are available for clean energy installations. The three available bonuses are: 1) for projects located in designated energy communities; 2) for projects meeting domestic contents requirements; and 3) for projects located in, or benefitting low-income communities. Each of these bonuses is worth 10%-20% of the project cost and can be stacked on top of the regular 30% credit, altogether amounting to 40-70% of project cost in credits. You can read more about the bonus credits from the Department of Energy here. While the energy communities and domestic content bonuses are universally available for solar and renewable energy installations that meet the requirements, the low-income communities bonus is only available competitively by lottery through the U.S. Department of Energy. Currently, sourcing solar project components eligible for the domestic content requirement can be difficult, but as U.S. solar manufacturing scales up, more suppliers will meet the requirements.

How Does Elective Pay Work?

To receive the refund, an eligible entity must complete pre-filing registration with the IRS after the project has gone into service. They will then receive a registration number from the IRS for each applicable credit. When tax season comes around, the entity can file an annual tax return and elect payment for the value of each tax credit that was assigned a registration number. This election is treated by the IRS as if the entity had made a payment of federal income taxes equal to the value of the credit for the tax year. The IRS then issues a refund to the entity equal to the full value of the credit, assuming no taxes are owed. You can find more details on the IRS’ frequently asked questions webpage here.

Here’s How to Find Out More About Elective Pay

The IRS is holding office hours over the next 6 weeks to help tax-exempt entities understand their newly finalized guidance and assist with the pre-filing registration process. They will also be there to answer questions about elective pay and the transfer of tax credits. The office hour dates are as follows:  

But That’s Not All… IRA Also Expands the Energy Efficient Building Tax Deduction 

In addition to the elective pay program, the IRA is also transforming the tax deductions for energy efficiency for commercial buildings in an effort to further incentivize the use of energy efficient systems. Owners of energy efficient commercial buildings have always had the chance to claim the deduction, and governmental entities historically could indirectly benefit from the deduction by transferring it to the energy efficiency professional in charge of the project. But soon, once the IRS issues forthcoming guidance, nonprofits who own their buildings will also able to indirectly benefit from the 179D deduction. The IRA also lowered the minimum amount of energy savings required to claim the deduction to 25%, and increased the maximum deduction amount to up to $5.00 per square foot. The National Council of Nonprofits has more information available here.

The IRA makes the Energy Efficient Commercial Building tax deduction available to: 

  • Owners of commercial qualified buildings 
  • Designers of an energy efficient commercial building property (EECBP) or an energy efficient commercial building retrofit property (EEBRP) owned by a tax-exempt entity which includes
    • Not-for-profit organizations
    • Not-for-profit schools
    • Religious organizations
    • Government entities

The IRS is expected to issue guidance in the coming months to formalize these changes to expand 179D.

Help Spread the Word in Your Community 

SACE is working to make sure that local governments, non-profits, and community members know about the benefits of the IRA. Individuals all over the Southeast should also make sure that their local governments are making the most use out of these new incentives to lighten the load on local taxpayers and play an active a role in the transition to clean energy. If you work for a government agency or a nonprofit organization, please take some time to consider how you and your organization might benefit from these newly finalized incentives. Be sure to share this blog with decision-makers in your community, and stay tuned for more information.

Carynton Howard
Carynton joined the Southern Alliance for Clean Energy in 2024. As Climate Advocacy Coordinator, she identifies and advocates for climate and clean energy policy changes in the Southeast. Her focus…
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