The Inflation Reduction Act of 2022 (IRA) provides organizations exempt from income tax under the Internal Revenue Code (IRC) an opportunity to obtain monetary benefits from investments in clean energy. To further promote new clean energy investments, the IRA allows direct payments from the IRS to specified entities of clean energy tax credits, simplifying access to key incentives that support the environment.
Qualifying Entities: Nonprofit organizations, state and political subdivisions, the Tennessee Valley Authority, Indian tribal governments, any Alaska Native corporation, and rural electric cooperatives are now eligible for and may receive energy tax credits for new capital investment in or production of clean energy. Eligible nonprofit entities may include higher education (public and private), civic, charitable, religious, and political organizations, among others.
How to Monetize the Credit: Energy project owners and producers will now have access to “direct pay” tax credits for qualifying clean energy projects as opposed to getting a tax credit against taxes due or paid. The election treats eligible entities as making a payment against taxes imposed by the IRC equal to the amount of such credit. It allows for the monetization of tax credits via a cash payment that may significantly offset project costs. The rules for the credits stay the same, although they have essentially been turned into cash grants or cash-back projects.
- The Direct Pay Option
- Despite generally owing no tax, certain entities under this legislation may elect to receive payments equal to the amount of credits generated, like claiming tax refunds.
- The election must be made no later than the due date—including extensions—for the tax return of the year in which the election is made (or a date determined by Treasury if the eligible entity is not required to file a return), but in no event earlier than 180 days after the enactment of the direct pay provision (Section 6417).
- For the production tax credit (PTC), the election applies to the 10-year period beginning on the date the facility is placed in service. In contrast, the investment tax credit (ITC) may be claimed in the year the eligible property is placed in service. The legislation includes provisions for how partnerships and S corporations must process direct pay.
- For those that can qualify for direct pay, and with respect to certain credits, a facility loses its ability to qualify for 100% direct pay overtime, absent meeting domestic content requirements.
Credit Amounts: The credits have a base credit and bonus credit structure. For example, if the maximum net output of a project is one megawatt (MW) (alternating current) or greater, and if you meet the prevailing wage and apprenticeship standard, you can raise the credit by a multiplier of five. If the maximum net output of a project is less than one MW, the credit automatically gains the multiplier of five. There are additional bonuses for reaching a specified percentage of U.S. manufacturing in the project and locating projects in defined energy communities. In summary, the amount of the tax credit varies depending on the type of project, the date construction begins, and the date the project is placed in service, among other factors.
The 2022 base rate for the PTC is currently 0.55 cents per kilowatt-hour (kWh) as adjusted for inflation, and the base rate for the ITC is currently 6%. If the project either (i) does not exceed one MW or (ii) meets federal prevailing wage and apprenticeship standards, these rates may increase five times to 2.75 cents per kWh for the PTC and to 30% for the ITC.
- Section 45 PTCs are eligible for direct payments and apply to the production or output of electricity from renewable energy sources.
- The IRA extends the current PTC framework for qualified facilities that begin construction prior to January 1, 2025 but (as with the ITC) implements a new structure with a “base credit amount” and “increased credit amount.” The base credit amount and increased credit amount, along with the requirements that must be satisfied to qualify for the increased credit amount, are described in detail below. Qualified projects include wind, closed and open loop biomass, geothermal, landfill gas, trash, qualified hydropower, and marine and hydrokinetic facilities, but note the base credit amount is reduced by one-half for open-loop biomass facilities, small irrigation power facilities, landfill gas facilities, and trash facilities.
- Tax credits are earned as the relevant kWh or other measurement is produced. Credits are available for 10 years after the project is placed into service.
- Under the IRA, there are opportunities to increase the credit amount for qualifying facilities that are placed in service after December 31, 2022.
- Section 48 ITCs apply to the upfront purchase of parts, materials, labor, and energy property.
- Energy projects may include one or more energy properties. Each project would have its own ITC.
- The IRA extends the current framework of the ITC and implements a similar base credit and increased credit structure for energy properties that begin construction prior to January 1, 2025. Qualified energy properties include solar, fiber-optic solar, qualified fuel cell, qualified microturbine, combined heat and power system, qualified small wind, and waste energy recovery properties. The IRA also permits taxpayers to claim the ITC with respect to several additional technologies, including standalone energy storage, qualified biogas property, fuel cells using electromechanical processes, dynamic glass, and microgrid controllers. The election to claim the ITC in lieu of the PTC for otherwise eligible PTC facilities is retained.
- The ITC is 30% for eligible projects of one MW or greater if construction of the facility begins prior to January 29, 2023. This is a short reprieve for meeting the prevailing wage and apprenticeship standard. As such, any facility that has been placed in service in 2022 or has yet to be placed in service may now qualify for the 30% ITC if construction of such facility began prior to January 29, 2023, including facilities originally intended to qualify for the 26% ITC by beginning construction in 2020, 2021, or 2022. For facilities that were placed in service prior to January 1, 2022, the historical ITC phasedowns remain intact.
Credit Programs Available for Nonprofits
Nonprofit organizations can take advantage of many new clean energy opportunities that were previously not available. For example, for qualified commercial vehicles, e.g., electric vehicles, tax-exempt entities can claim a tax credit for up to 30% of the cost of the vehicle, subject to per-vehicle dollar limitations ($7,500 or $40,000, depending on the type and size of the vehicle). Next, for alternative fuel vehicle refueling property, e.g., electric vehicle charging stations, tax-exempt entities can claim a tax credit for up to 30% of qualified project costs (subject to a per-project limitation of $100,000), provided the property is located either in a low-income area or a non-urban area. Lastly, the IRA offers a quasi-production tax credit for certain fuels, e.g., zero-emission nuclear, clean hydrogen, and other clean fuels, produced from qualified facilities.
The following is a listing of clean energy tax credits eligible for direct pay elections:
| Credit | Code Section |
|---|---|
| Alternative Fuel Vehicle Refueling Property Credit | 30C |
| Renewable Energy Production Credit | 45 |
| Carbon Oxide Sequestration Credit | 45Q |
| Zero-Emission Nuclear Power Production Credit | 45U |
| Clean Hydrogen Production Credit | 45V |
| Credit for Qualified Commercial Clean Vehicles | 45W |
| Advanced Manufacturing Production Credit | 45X |
| Clean Electricity Production Credit | 45Y |
| Clean Fuel Production Credit | 45Z |
| Renewable Energy Investment Credit | 48 |
| Qualifying Advanced Energy Project Credit | 48C |
| Clean Electricity Investment Credit | 48E |
Benefits of Prevailing Wage & Apprenticeship
The IRS published Notice 2022-61 to provide guidance on the key prevailing wage and apprenticeship labor standards (W&A Requirements) generally required to obtain the full expected credit amount for tax credits enacted, expanded, or extended under the IRA. The W&A Requirements must be satisfied with respect to the construction of qualified facilities, properties, projects, or equipment (collectively, facilities) and, to varying extents, the alteration and repair of facilities.
The wage determination is the list of basic hourly wage and fringe benefit rates for each classification of laborers and mechanics in a predetermined geographic area for a particular type of construction. The information can be found at SAM.gov. If the information is not available, the taxpayer must contact Wage and Hour Division to obtain the information.
The notice states that a taxpayer complies with the apprenticeship requirements for the IRA clean energy credits if the following are met: (1) the Apprenticeship Labor Hour Requirements, subject to any applicable Apprenticeship Ratio Requirements; (2) the Apprenticeship Participation Requirements; and (3) the general record-keeping requirements are adhered to establish that the Apprenticeship Labor Hour and the Apprenticeship Participation Requirements have been satisfied.
To satisfy the Apprenticeship Labor Hour Requirements, apprentices must work a certain percentage of the total labor hours based on when construction of the qualified facility began:
- Construction began before January 1, 2023: 10% of total labor hours
- Construction began after December 31, 2022 and before January 1, 2024: 12.5% total labor hours
- Construction begins after December 31, 2023: 15% total labor hours
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