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Clean Energy Tax Incentives for Public Sector Entities

State, local, and tribal governments may benefit from clean energy tax incentives in the Inflation Reduction Act. Read on for details.
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In 2022, Congress passed the Inflation Reduction Act (IRA), which includes a host of tax incentives intended to accelerate investment in clean energy solutions in every sector of the economy. State, local, and tribal governments stand to benefit from these incentives.

This article examines some of the tax credits available to state, local, and tribal governments under the IRA, especially if your entity 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, delivery trucks, etc.
  • Installing charging stations for electric vehicles

Many of these credits are available as a base amount with additional bonus credit amounts available. The first bonus amount is a five-times multiple if certain prevailing wage and apprenticeship requirements are met. The IRS provided initial guidance regarding the prevailing wage and apprenticeship requirements. For certain credits, the amount of the credit also can increase up to 10 percentage points if the project meets certain domestic content requirements for steel, iron, and manufactured products. In some cases, an extra 10% bonus credit may be claimed on projects in an “energy community.”

Some of the tax credits examined 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 IRA tax credits as “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.

With the direct pay option, many of these tax credits may be used as cash grants that help offset costs of the energy-efficient investments your entity is considering over the next 10 years. For a full list of such tax credits and more information on how state, local, and tribal governments can take advantage of these incentives, view 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% if construction begins before January 1, 2033, and then phases out to 5.2% for construction beginning after December 31, 2032 and 4.4% for construction beginning after December 31, 2033 and before January 1, 2035.

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, and
  • Another 10% if the property is in an “energy community,” e.g., certain low-income communities.

This means the maximum ITC can be as high as 50%.

Here are some examples of what state, local, and tribal governments can invest in to take advantage of this opportunity:

  •  Installing solar panels on the roof of your facility
  • Using energy-efficient batteries for energy storage
  • Updating your heating and power systems
  • Installing dynamic glass

State, local, and tribal governments may use the direct pay option and elect to receive payments equal to the credit amount.

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. After 2024, Internal Revenue Code Section 45Y takes its place for facilities that keep greenhouse emissions zero.

As the ITC examined above, the credit amount is impacted by whether prevailing wage and apprenticeship requirements are met, if the domestic content requirements are met, and if the project is in an energy community. The base credit amount is adjusted annually for inflation. For 2022, the maximum PTC is 1.3 cents per kilowatt hour (kWh) for electricity generated by landfill gas, open-loop biomass, municipal solid waste resources, and small irrigation power facilities, and up to 2.75 cents per kWh for electricity generated from wind, closed-loop biomass, and geothermal resources.

State, local, and tribal governments may elect to receive payments equal to the credits generated through the direct pay option for qualified facilities placed in service after December 31, 2022 and construction before January 1, 2024. For construction after January 1, 2024, entities are eligible for 90% of the credit if domestic content is not met. If an organization uses a tax-exempt bond for financing, the credit is reduced by up to 15%.

Energy Efficient Commercial Buildings Deduction

The IRA significantly expanded the energy efficient commercial buildings property deduction under §179D. Starting January 1, 2023, the base deduction is $0.5 per square foot, with a maximum deduction of $5 per square foot if prevailing wage and apprenticeship requirements are met. The qualification for the tax deduction is available when a building’s energy cost is reduced by at least 25% compared to an applicable reference building. The IRA eliminated the lifetime cap, and deduction limits will now reset every three or four years, depending on the building. The IRA continues to allow government entities to allocate the deduction to the person primarily responsible for designing the property.

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 (ASHRAE) standards affirmed by the secretary at least four years before construction completion, a change from the current standard of two years before construction began.

If your entity 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.

Qualified Commercial Clean Vehicles Credit

If your entity 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 is no limit on the number of clean vehicles your organization can claim, and the credit can be carried over as a general business credit.

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 make sure the seller discloses to you as the buyer the amount of any new clean vehicle tax credit allowable for the vehicle and take this in consideration when establishing the price.

Before purchasing a vehicle, remember also to check the IRS index of qualified manufacturers since to qualify for the credit, the vehicle must be made by a qualified manufacturer.

Alternative Fuel Vehicle Refueling Property Credit

For state, local, and tribal governments in low-income communities or non-urban areas, the IRA provides a tax credit for alternative fuel—for example, electricity, ethanol, natural gas, hydrogen, biodiesel, and others—vehicle refueling, and charging property, starting in 2023 and through December 31, 2032.

In general, the base credit amount is 6% of the cost, limited to $100,000 credit per item of property. However, a 30% credit is available for projects meeting prevailing wage and apprenticeship requirements. Like the clean vehicle credit, the entity selling the charging station will get the credit and the credit amount should be taken into consideration in negotiating the price.

Our Approach

Professionals at FORVIS can work with your educational institution to help:

  • Identify tax opportunities under the IRA,
  • 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.

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