Powering Change: How Nonprofit Organizations Can Access Elective Pay Tax Credits

by: Nicole Davis
Verified by: CPA

August 2, 2023

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On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA), marking the greatest historic action ever taken by Congress to address sustainable energy and climate change.

The implementation of the Inflation Reduction Act introduced the expansion of tax credits specifically aimed at clean energy and carbon reducing projects. This development has created a unique and significant level of policy certainty and opportunities for entities involved in manufacturing, installation, and production of clean energy.

These entities- which now includes tax-exempt organizations- can now expect favorable conditions and incentives for their operations in the clean energy sector over the next decade.

What Is Elective Pay?

The option of elective pay, also known as direct pay, makes certain clean energy tax credits to be effectively converted into refundable credits.

For the first time, nonprofits organizations can take advantage of direct pay tax credits for sustainable energy projects that meet certain criteria. Tax-exempt organizations, State or political subdivisions, the Tennessee Valley Authority, Indian tribal governments, Alaska Native Corporations, and rural cooperatives are among the entities that are entitled to make an election for certain benefits beginning with the first taxable year after December 31, 2022.

How can I receive the payment?

After determining the credit and qualifying project, eligible organizations will need to complete pre-filing registration with the IRS.  While complete details on this registration process haven’t been released, once a project is registered, the IRS will provide a number that will be entered on your tax return as part of the election.

The election must be made on a timely filed return (including extensions) and cannot be made on an amended return. Once the election is accepted, the IRS will reimburse the taxpayer for the full dollar amount of the tax credit and is effectively treated as an overpayment of tax.

Overview – Main Credits Available for Direct Pay

While there are many credits available for elective pay (complete list at the end of the article), we have highlighted a few that we think will be most beneficial. 

Investment Tax Credits

The investment tax credit (ITC) now offers tax credits of 6 percent (and up to 30 percent if prevailing wage and apprenticeship requirements are met) of the qualifying investment (basis) of each energy property that is placed in service during the taxable year. It is available for energy facilities that commence construction before January 1, 2025, after which it is replaced by the Clean Electricity Investment Tax Credit.

The term “energy property” encompasses a broad range of assets, including fuel cell, solar, geothermal, small wind energy, energy storage, biogas, microgrid controllers, waste energy recovery property, and combined heat and power properties that are eligible for depreciation or amortization.

To be eligible for the credit, a taxpayer must either construct, reconstruct, or erect the property or be the original acquirer. Furthermore, the ITC extends to qualified intercompany property that undergoes an addition, modification, or upgrade to a transmission or distribution system.

Production Tax Credit

The IRA extended and modified existing Production Tax Credit.  These modifications primarily include updates to prevailing wage and apprenticeship standards, the addition of bonus credit amounts for energy communities and domestic content. The credit aims to incentivize the production of electricity from eligible renewable sources. It is available for energy facilities that commence construction before January 1, 2025, after which it is replaced by the Clean Electricity Production Tax Credit (PTC).  The credit amount for is .55 center per kilowatt or 2.75 cents per kilowatt if the prevailing wage and apprenticeship rules are met.

An energy facility is defined as any facility that generates electricity or feeds electricity into the grid, utilizing sources such as wind, biomass, geothermal, solar, small irrigation, landfills and trash, hydropower, and marine and hydrokinetic renewable energy. These modifications seek to encourage the development of renewable energy projects while incorporating considerations for local communities and domestic manufacturing.

Note: certain projects are eligible for either the ITC or PTC, but not both.

ITC and PTC in Practice

A more common example of construction that may qualify for ITC or PTC is solar panel installation. If a nonprofit begins construction of solar panels on a building in 2023, they may then be eligible for either the ITC or PTC. The ITC is based on a percentage of the cost of installation during the year and the PTC is a per kilowatt-hour credit for electricity generated by solar for the first 10 years of operation.

Analysis should be done as to which would be more beneficial for the organization.

Alternative Fuel Vehicle Refueling Property Credit

The Alternative Fuel Vehicle Refueling Property credit provides a tax incentive for taxpayers who invest in qualified alternative fuel vehicle refueling property. Although this credit initially expired in 2021, it has been reinstated by the IRA for tax years beginning after December 31, 2022. The credit is applicable to refueling and charging property.  Important to note, these credits are limited property located in low- income and non-urban areas.

An example of refueling property that is increasingly popular are charging stations installed at nonprofit locations.

What Credits Are Eligible For Elective Pay?

I.R.C. §Description
§ 30CAlternative Fuel Vehicle Refueling Property
§ 45Production Tax Credit
§ 45QCarbon Oxide Sequestration Credit
§ 45UAdvanced Zero-Emission Nuclear Power Production
§ 45VClean Hydrogen Production Credit
§ 45XAdvanced Manufacturing Production Credit
§ 45YClean Electricity Production Tax Credit
§ 45ZClean Fuel Production Credit
§ 48Investment Tax Credit
§ 48CQualifying Advanced Energy Project Credit
§ 48EClean Electricity Investment Tax Credit
§ 45WQualified Commercial Vehicles

Leveraging the main credits available for elective pay can offer numerous benefits for organizations, including enhanced cash flow, reduced financial burden, increased financial flexibility, improved project viability, and a competitive advantage.

By capitalizing on these opportunities, organizations can optimize their financial resources, accelerate growth, and contribute to a more sustainable future. It is essential for organizations to explore and take full advantage of these credits to maximize their potential benefits and drive positive impact.

Smith + Howard: Trusted Advisors to Nonprofit Organizations

A trusted advisor brings a wealth of expertise and specialized knowledge to the table. They should help you understand the unique challenges and opportunities that nonprofit organizations face and can provide tailored guidance on navigating the complexities of tax credits. By partnering with a trusted advisor, nonprofits can ensure they are making informed decisions and maximizing the benefits of available credits.

At Smith + Howard, our nonprofit practice is proud to have served the nation’s leading nonprofit organizations for over 50 years. Our advisory team is available to provide strategic guidance around building the financial foundation needed to have a lasting impact on communities. 

To learn more about Smith + Howard’s support for nonprofit organizations, contact an advisor.

How can we help?

If you have any questions and would like to connect with a team member please call 404-874-6244 or contact an advisor below.