In 2022, Congress passed the Inflation Reduction Act (IRA), which includes a host of climate and energy tax incentives intended to accelerate private investment in clean energy solutions in every sector of the economy. Physician practices, long-term care facilities, hospital systems, and other healthcare organizations, including tax-exempt organizations, that want to make their practices more eco-friendly and energy efficient stand to benefit from these incentives.
This article examines some of the tax credits available to healthcare organizations within the IRA, especially if your organization is considering investing in any of the following activities:
- Building new energy-efficient buildings
- Making ongoing improvements to existing facilities
- Installing solar panels
- Purchasing a new fleet of vehicles, e.g., buses, transportation for parking lots, ambulances, etc.
- Installing charging stations for electric vehicles
Note that many of these credits are available in two layers: a base amount and then an additional bonus credit amount if certain prevailing wage and apprenticeship requirements are met. The IRS issued initial guidance to help taxpayers comply with the prevailing wage and apprenticeship requirements.
Some of the tax credits mentioned below may be transferred or elected as “direct pay.” Tax-exempt entities, states and political subdivisions, the Tennessee Valley Authority, Indian tribal governments, Alaska Native Corporations, and rural electricity cooperatives may elect to treat tax credits as direct payments of taxes to the IRS, i.e., “refundable” tax credits. All other taxpayers have the option to transfer and sell certain tax credits to unrelated third parties. Credits may only be transferred once and must be taken in the taxable year in which the credit is determined or in the following year.
Special Opportunities for Tax-Exempt Healthcare Organizations
Many of the IRA tax credits and incentives detailed below are available to nonprofit organizations. With the direct pay option, many of these tax credits may be used as cash refunds that can help offset costs of the energy-efficient investments for healthcare organizations. For a full list of such tax credits and more information for how tax-exempt organizations can take advantage of these incentives, see FORsights™ article, “Nonprofit & Governmental Organizations to Benefit from Tax Credit Opportunities in the IRA.”
Investment Tax Credit (ITC) for Energy Property
For projects beginning construction prior to January 1, 2025, the IRA provides a credit of 6% (base amount) of qualified investment costs of a renewable energy project. Fuel cell, solar, geothermal, small wind, energy storage, biogas, microgrid, controllers, and combined heat and power properties are eligible for this tax credit. Note that for geothermal heat property, the base investment tax credit is 6% for the first 10 years and then phases out to 5.2% in 2033 and 4.4% in 2034.
The credit amount can increase in three ways:
- By five times the base amount for projects meeting prevailing wage and apprenticeship requirements,
- Another 10% if the project meets certain domestic content requirements for steel, iron, and manufactured products, and
- Another 10% if the property is in an “energy community,” e.g., a brownfield site, census tracts adjoining a closed coal mine/retired coal-fired electric generating unit, sand areas where “0.17% or greater direct employment or at least 25% of local tax revenues [are] related to extraction, processing, transport, or storage of coal, oil, or natural gas,” and unemployment in that area is at or above the national average in the prior year.
This means the maximum ITC can be as high as 50%, but it’s expected that for many taxpayers the credit amount may be 30% (base amount x 5 if labor requirements are met).
Here are some examples of what your healthcare organization can invest in to take advantage of this opportunity:
- Installing solar panels on the roof of your healthcare facility
- Using energy-efficient batteries for energy storage
- Updating your heating and power systems
- Installing dynamic glass
This credit is transferable for all taxpayers other than tax-exempt organizations. Instead, nonprofit organizations may use the direct pay option. To learn more about how the ITC can benefit tax-exempt organizations, see FORsights article, “Implications of the Inflation Reduction Act on Tax-Exempt Entities.”
Renewable Electricity Production Tax Credit (PTC)
Facilities generating electricity for sale to third parties from renewable electricity sources are potentially eligible for the PTC for 10 years after the project is placed in service. To qualify, construction of the project must begin before January 1, 2025.
Like the ITC explained above, the credit amount is impacted by whether prevailing wage and apprenticeship requirements are met, if the domestic content requirements are met, or if the project is located in an energy community. The base credit amount is adjusted annually for inflation. For 2023, the PTC base amount is 0.55 cents per kWh, with a maximum PTC of 2.75 cents per kWh. This credit is available for electricity generated by landfill gas, open-loop biomass, municipal solid waste resources, small irrigation power facilities, wind, closed-loop biomass, and geothermal resources.
This credit is transferable and tax-exempt organizations may elect to receive payments through the direct pay option.
Energy Efficient Commercial Buildings Deduction
The IRA significantly expanded the energy efficient commercial buildings property deduction under Section 179D. Starting January 1, 2023, the maximum deduction amount increased to $5 per square foot (adjusted for inflation), depending on the square footage of the building that is energy-efficient and if prevailing wage and apprenticeship requirements are met. The IRA eliminated the lifetime cap on this incentive, and deduction limits will now reset every three or four years, depending on the building. The IRA also expanded the §179D deduction eligibility to designers of commercial buildings owned by tax-exempt entities.
The IRA also changed the reference building standard used to determine the building’s energy efficiency. Buildings placed in service on or after January 1, 2023 should use the American Society of Heating, Refrigerating and Air-Conditioning Engineers standards affirmed by the secretary at least four years before construction completion, a change from the current standard of two years before construction began. For more information on the updated reference building standards for 2023, see IRS Announcement 2023-1.
If your healthcare organization is considering making energy efficiency improvements to your building envelope, HVAC, or interior lighting, then the expanded §179D deduction may help offset some of the costs of these projects.
New Energy Efficient Homes Credit
The IRA retroactively extended the New Energy Efficient Homes Credit through 2032 (the credit expired at the end of 2021). Some new rules apply for homes acquired after 2022. For example, there’s no longer a height requirement (under previous rules, properties were limited to three stories).
The base credit amounts are as follows:
- $2,500 for new homes meeting Energy Star standards
- $5,000 for certified zero-energy ready homes
- For multifamily, $500 per unit for Energy Star and $1,000 per unit for zero-energy ready (the base amount may be increased by five if prevailing wage requirements are met)
Since this credit is limited to residential property only, in the healthcare industry, it could be beneficial for developers of assisted living facilities.
This credit is not transferable, and it’s not eligible for direct pay. However, it can be used along with the Energy Efficient Commercial Buildings Deduction explained above.
Qualified Commercial Clean Vehicles Credit
If your healthcare organization is considering investing in a new fleet of vehicles for commercial use, the IRA provides a tax credit for purchasers of qualified commercial clean vehicles. The credit amount is the lesser of:
- 15% of the vehicle’s basis, i.e., cost to the buyer, or 30% for vehicles without internal combustion engines, i.e., not powered by gas or diesel, or
- The amount the purchase price exceeds the price of a comparable internal combustion vehicle, i.e., the incremental cost of the vehicle
This credit is capped at $7,500 for vehicles under 14,000 pounds and $40,000 for all other clean vehicles. However, there’s no limit on the number of credits your organization can claim, and the credit can be carried over as a general business credit. This credit is not transferable, but nonprofit organizations can elect to get a cash refund instead. When vehicles are sold to certain tax-exempt organizations or governmental units, the vehicle dealer is treated as the taxpayer that placed the vehicle in service for purposes of this credit, but taxpayers should ensure the seller discloses to the buyer the amount of any new clean vehicle tax credit allowable for the vehicle.
For taxpayers to qualify for the credit, the vehicle must be made by a qualified manufacturer. Therefore, taxpayers should verify that their vehicle’s manufacturer is listed on the IRS index of qualified manufacturers prior to purchase.
Alternative Fuel Vehicle Refueling Property Credit
For healthcare organizations in low-income communities and non-urban areas, the IRA could provide a tax credit for alternative fuel, e.g., electricity, ethanol, natural gas, hydrogen, biodiesel, and others; vehicle refueling; and charging property, starting in 2023 and through December 31, 2032.
For businesses and tax-exempt organizations, the base credit amount is 6% of the cost, limited to $100,000 credit per item of property. However, organizations can claim a 30% credit for projects meeting prevailing wage and apprenticeship requirements.
For property used in a trade or business, this tax credit is transferable, and eligible for direct pay by tax-exempt organizations.
Professionals at FORVIS can work with your healthcare organization to help you:
- Identify tax opportunities under the IRA
- Weigh options and discuss considerations surrounding the decision to invest in clean energy
- Quantify the potential financial impact of these tax incentives, and
- Stay in compliance if you claim any of these credits or deductions
If you have any questions or need assistance, please reach out to a professional at FORVIS or submit the Contact Us form below.