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. Nonprofit organizations, including higher education (public and private), civic, charitable, religious, and political organizations, that want to make their practices eco-friendlier stand to benefit from these incentives.
This article highlights some of the tax credits available to nonprofit organizations under 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, delivery trucks
- Installing charging stations for electric vehicles
Many of these credits are available in two layers: 1) a base amount and 2) an additional bonus credit amount if certain prevailing wage and apprenticeship requirements are met. The IRS initial guidance was issued to help taxpayers comply with the prevailing wage and apprenticeship requirements. For certain credits, the amount of the credit can also 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 on projects in an “energy community” may be claimed.
Some of the tax credits noted 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 utilized as cash grants that help offset costs of the energy-efficient investments your nonprofit organization is considering over the next 10 years. View a detailed list of clean energy tax credits and more information on how tax-exempt organizations can take advantage of these incentives.
Investment Tax Credit for Energy Property (ITC)
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
- 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 your nonprofit organization 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
Nonprofit organizations may use the direct pay option and elect to receive payments equal to the credit amount. See the FORsights™ article “Implications of the Inflation Reduction Act on Tax-Exempt Entities” to learn more about how the ITC can benefit tax-exempt organizations.
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, IRC Section 45Y takes its place for facilities that keep greenhouse emissions zero.
As the ITC noted 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 located in an energy community. The base credit amount is adjusted annually for inflation. For 2022, the maximum PTC is 1.3 cents per 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.
Nonprofit organizations may elect to receive payments equal to the amount of 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, institutions are eligible for 90% of the credit if domestic content is not met. If an organization uses tax-exempt bonds 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 $0.50 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 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 (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 nonprofit 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.
Qualified Commercial Clean Vehicles Credit
If your 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 less than 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 to also check the IRS index of qualified manufacturers because in order to qualify for the credit, the vehicle must be made by a qualified manufacturer.
Alternative Fuel Vehicle Refueling Property Credit
For nonprofit organizations in low-income communities or non-urban areas, the IRA provides 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 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. Like the clean energy credit, the entity selling the charging station will get the credit and the credit amount should be taken into consideration in negotiating the price.
For property used in a trade or business, this tax credit is transferable, and eligible for direct pay by nonprofit organizations.
Our professionals at FORVIS can work with your nonprofit organization to:
- Identify tax opportunities under the IRA.
- Quantify the potential financial impact of these tax incentives.
- Help your organization 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.