The Inflation Reduction Act of 2022 (IRA) provides a number of renewable energy credits that are newly available to nonprofits under a direct pay election. Tax-exempt entities, states and political subdivisions, the Tennessee Valley Authority, Indian tribal governments, Alaska Native Corporations, and rural electricity cooperatives are eligible to make the direct payment election and treat the IRA tax credits as “refundable” tax credits. This allows organizations that have no tax liability to receive a refundable credit for investments in clean energy projects, effectively functioning as a cash grant to help offset the cost of the energy-efficient investments that many nonprofits are considering. Some of the energy credits that are available include:
Section 48 Investment Tax Credit for Energy Property
This credit is available to organizations that install specific types of energy property. The base credit is 6% of the cost of the property, but if projects meet prevailing wage and apprenticeship standards, the credit is subject to a 5x bonus, resulting in a credit of 30%. In addition, if the project meets certain domestic content requirements, the credit can increase by an additional 10%, and if the property is in an “energy community,” there is an additional 10% increase in the credit amount. This results in a maximum potential credit of 50%. Examples of property that qualifies for this credit include:
- Solar panels
- Updated heating and power systems
- Dynamic glass
- Energy-efficient batteries for energy storage
Section 45 Renewable Electricity Production Tax Credit
Organizations that have invested in a facility that uses renewable sources to generate electricity for sale to third parties are eligible for this credit. To qualify, the project construction must begin before January 1, 2025, and the credit is available for 10 years after the project is placed in service.
Similar to the Investment Tax Credit, the credit amount is impacted by meeting the prevailing wage and apprenticeship requirements, domestic content requirements, and if the project is located in an energy community. The maximum production tax credit is 1.5 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. For construction after January 1, 2024, organizations are eligible for 90% of the credit if the domestic content requirements are not met, and if tax-exempt bond financing is used, the credit is reduced by up to 15%.
Section 30C Alternative Fuel Vehicle Refueling Property Credit
Alternative fuel vehicle refueling property placed in service by an organization during the tax year may qualify for a tax credit under Internal Revenue Code (IRC) §30C. Projects include electric vehicle charging stations, but also are available for ethanol, natural gas, hydrogen, biodiesel, and other types of alternative fuels. Beginning in 2023, the credit is limited to property placed in service within low-income communities or non-urban census tracts. The credit is 6% of the cost, limited to $100,000 per item of property, with a potential credit of 30% if the project meets prevailing wage and apprenticeship standards.
Section 45W Qualified Commercial Clean Vehicles Credit
For organizations considering an investment in a new fleet of vehicles, this credit provides a tax credit that is the lessor 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.
The credit is capped at $75,000 for vehicles less than 14,000 pounds and $40,000 for all other clean vehicles, with no limit on the number of credits claimed.
Summary
Clean energy tax credits present an exciting new opportunity for tax-exempt organizations to consider monetizing their investment in energy efficiency. Depending on location, state and local incentives may also be available. If you have any questions or need assistance, please reach out to a professional at FORVIS.