Many tax-exempt organizations desire to construct clean energy initiatives on their property. What many tax-exempt organizations are not aware of is that they may qualify for a special tax credit from the IRS. This special tax credit can result in a direct payment from the Department of Treasury based on the nature and scope of the clean energy project.
In 2022, Congress passed the Inflation Reduction Act (“IRA”), which contains a number of Clean Energy Tax Incentives that are available to tax-exempt organizations and eligible for elective pay tax credits (also known as “direct pay”) from the IRS. The White House has put together a detailed guide showing who qualifies for elective pay under the IRA and how a tax-exempt organization can apply for elective pay tax credits under the IRA’s provisions.
According to The White House, “[d]irect pay can help nonprofits afford to install clean energy, which can help them reduce their own energy use and save money so they can spend more resources on their mission. Nonprofits can also become local climate leaders by using their property to generate clean electricity that benefits their neighbors through technologies like community solar.” The IRS has also put together a list of the available clean energy tax credits for tax-exempt organizations here.
According to IRS Publication 5884, “[e]lective pay allows applicable entities (as defined), including tax-exempt and governmental entities (such as a local government) that would otherwise be unable to claim these credits because they do not owe federal income tax, to benefit from some clean energy tax credits by treating the amount of the credit as a payment of tax. With elective pay, an applicable entity that qualifies for a clean energy credit can notify the IRS of its intent to claim the credit and file an annual tax return to claim elective pay for the full value of the credit. The IRS would then pay the applicable entity the value of the credit.”
For projects begun, completed and put into use in 2024, the IRA has specifically made elective pay tax credit for tax-exempt organizations who complete energy property projects available under the Investment Tax Credit for Energy Property (“ITC”), pursuant to 26 U.S.C § 48 . The ITC applies to renewable energy projects, including solar energy projects, that generate electricity. (26 U.S.C § 48(a)(3)(A)(ii))
For projects that will be completed and put into use in 2025, there is a second, separate tax credit available under 26 U.S.C. § 48E called the Clean Electricity Investment Tax Credit (“CEITC”). Please note that the full amount of the tax credit under the ITC or the CEITC is wholly dependent on the type of project, with special bonuses available depending on the location, the type of labor used, and whether the energy generated will be serving low-income communities. Tax-exempt organizations should work closely with builders to carefully craft their project under this new law so that they may avail themselves of the full benefit of the tax credit. For more information, see IRS Notice 2023-17 here.
In order to receive an elective pay tax credit, tax-exempt organizations who wish to avail themselves of the ITC for their energy-saving project must first pre-file with the IRS using the IRS’s recently launched IRA/CHIPS Pre-Filing Registration Tool. Also, in IRS Publication 5884, the IRS released a detailed informational guide on how to use the pre-filing registration tool.
Pre-filing registration in a timely manner is vital to qualify for this program. According to the IRS announcement launching the pre-filing registration tool, “Even though registration is not possible prior to the beginning of the tax year in which the credit will be earned, the IRS recommends that taxpayers register as soon as reasonably practicable during the tax year. The current recommendation is to submit the pre-filing registration at least 120 days prior to when the organization or entity plans to file its tax return on which it will make its election. This should allow time for IRS review, and for the taxpayer to respond if the IRS requires additional information before issuing the registration numbers.”
If a tax-exempt organization’s clean energy project already went into effect in 2023, the organization will have to file the proper income tax return in a timely manner for the 2024 tax year. Tax-exempt organizations that generally do not file an income tax return and that seek to take advantage of the elective pay tax credit under the ITC are guided by the IRS to file Form 990-T. “The regular due date for Form 990-T filed by an exempt organization is the 15th day of the 5th month after the end of the tax year. For calendar year taxpayers, that due date is May 15. The automatic paperless extension extends the due date by 6 months (or for a calendar year taxpayer, extends the due date from May 15 to November 15).” (IRS Publication 5884, p. 6) Please consult the organization’s bylaws to determine the tax year end date and the subsequent filing deadline for the Form 990-T.
For more information regarding how tax-exempt organizations can qualify for this direct pay program, feel free to contact Brown & Streza for a consultation.
