The Inflation Reduction Act (IRA) passed last summer included direct pay program incentives for a variety of organizations, including tax exempt organizations. Prior to this updated legislation, nonprofit organizations often had to partner with developers or banks through power purchase agreements (PPA). While PPAs are still available and can benefit organizations by offering no out-of-pocket expenses, tax exempt organizations can now receive credits through direct pay with the extension of the tax credit program.
How do tax exempt organizations benefit?
Tax-exempt organizations such as public schools, cities, nonprofits and foundations, can now finance solar projects with the assistance of direct pay credits. Typically, tax paying entities receive the solar ITC as a check for 30% of the solar project cost, and now tax exempt entities qualify for the same direct pay program. Under the direct payment option, an eligible tax-exempt organization will be treated as if it had paid taxes to qualify for the the credit, and then will receive a refund for a percentage of the cost of the solar project. Official guidance from the Treasury Department is still awaited involving the logistics of the program, but basic qualifications are released.
Who qualifies for the ITC direct pay program?
- Tax exempt organizations
- Any organization that has filed an application with the federal government for tax-exempt status will qualify for direct pay. This can include nonprofit organizations, state colleges and universities, foundations, and charities.
- Governmental entities
- Any governmental entity, including state, local and tribal governments, qualifies for the direct pay program. This also covers public schools– a rapidly growing segment of the market seeking energy solutions.
- Rural electric cooperatives
- The Tennessee Valley Authority
There are two types of tax credits tax-exempt organization can receive for solar generation facilities. The first involves a one-time credit based on a percentage of the cost of the facility. The second credit is the premium tax credit (PTC) based on the amount of energy produced and sold by a solar project over 10 years with the credit granted annually. To qualify for this second tax credit, the solar facility must sell energy produced to unrelated third-parties. Additional tax credit bonuses are available for solar facilities to meet certain requirements, such as constructing a solar facility using 100% U.S. steel and iron, or with products that are mined, produced or manufactured in the U.S.
The solar ITC direct pay program passed through the IRA provides tax-exempt entities with a real opportunity to take advantage of solar-related tax credits that were not directly accessible to such organization before. These provisions can provide tax-exempt organizations greater flexibility in structuring the ownership and financing plans for their solar facilities, potentially leading to lower costs for energy projects.
Interested in taking advantage of the ITC direct pay program?
With increased incentives and bonuses available due to the IRA, now is the ideal time implement renewable energy solutions for your organization. Partnering with EnergyLink will expedite the process of designing, building and funding energy solutions across multiple project scales for your organization. Get started by clicking the button for a free quote. Want to stay up-to-date on the latest energy industry news? Fill out the form below!