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Governments, nonprofits can take advantage of 13 clean energy tax credits

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Governments, Nonprofits Can Take Advantage of 13 Clean Energy Tax Credits

Written by Allie Shepard, Clean Energy and Climate Planner II

Pictured: Solar thermal and an air-source heat pump. Source: National Reneweable Energy Lab.

July 24, 2024 - Over the past two years, the Inflation Reduction Act (IRA) has been instrumental in helping tackle the climate crisis here in Massachusetts and across the country. One of the key components of the IRA is a massive expansion of clean energy tax credits. In fact, almost 75% of the funding made available by the IRA is specifically for tax credits.1 Traditionally, governmental and other tax-exempt entities could not directly take advantage of tax credits like the solar investment tax credit to lower the costs of clean energy projects and needed to rely on third parties to own the project or help monetize the tax credit. However, the Elective Pay provision of the IRA is a game changer for governments seeking to own their clean energy projects and meet their climate goals.

Through Elective Pay – which is commonly referred to as “Direct Pay” – governments and non-profits can elect to receive payments equal to the full value of the tax credit. Direct Pay is available for 13 different tax credits, including rooftop and community solar, geothermal heat pumps, wind, microgrids, battery storage, electric vehicles and charging infrastructure, and more.

Projects placed into service between January 1, 2023 and December 31, 2032 are eligible for Direct Pay, but projects must be placed in service and/or begin production before an entity can file for the tax credit. There’s no limit to how much funding a municipality can receive through Direct Pay (annually or through 2032) and, unlike competitive grants, Direct Pay is a certain source of funding if all the requirements are met. Additionally, Direct Pay can be combined with other grants, funding, and loans to make clean energy projects more affordable.  

The value of the tax credits varies across the different credit types. For example, the Investment Tax Credit for Energy Property (such as solar or geothermal) starts at 6% of the investment basis and the Credit for Qualified Commercial Clean Vehicles is up to $7,500 for small vehicles and up to $40,000 for medium- and heavy-duty vehicles. Many projects may also be eligible for bonuses or value multipliers if they are located in low-income communities or energy communities2 and meet requirements for prevailing wage, apprenticeship3, and domestic content (only for projects larger than 1 MW). In many cases, the basis plus the bonus credits can cover up to 30-40% of the project costs.

As an example, consider a municipality that installs a solar project for $1 million. The base credit would be 6% of the project cost, or $60,000. The project is located near where a coal power plant was shut down in 2012 (a Coal Closure Energy Community), so it is eligible for an additional 10% credit, or $100,000. Finally, the project met the prevailing wage and apprenticeship requirements, so is eligible for the 5x bonus of the basis credit, adding another $240,000. In total, the credit amount is $400,000, or 40% of the project costs.

To take advantage of this significant funding source, local governments should begin to plan for projects that will be placed in service over the next few years. Importantly, payments through Direct Pay are not received until the year the project is placed into service, and the value of the tax credits is not transferrable, meaning local governments will still need to plan around the initial project expenditure. Successfully planning projects and filing for Direct Pay will require collaboration across sustainability, planning, public works, finance, legal, and other departments. Learning about the requirements, filing processes early on, and developing systems to track records will help smooth and streamline the process when it comes time to file.

Depending on whether the tax year aligns with the fiscal year or the calendar year, the deadline for filing for Direct Pay is either May 15 or November 15 of the following year, though all entities are eligible to get a six-month extension. Importantly, filers must pre-register each project or credit property to get a registration number to file the tax return. For example, if a municipality placed a solar project in service in September 2023 and opts to use the fiscal year (July 2023-June 2024) to file, the initial deadline for the fiscal year filing is November 15, 2024, with the option to extend the deadline to May 15, 2025. The municipality should submit a pre-filing registration through the IRS’s online portal as soon as the property is placed in service, but at the very latest must do so within 120 days of the filing deadline.

Various forms are required to file for tax credits, including the Exempt Organization Business Income Tax Return (Form 990-T) and IRS General Business Credits (Form 3800), and depending on the credit type, may include the Alternative Charging Form (IRS Form 8911), Electric Vehicle Form (IRS Form 8926), and the Investment Tax Credit Form (IRS Form 3468).

The process of claiming tax credits may seem a bit daunting for municipalities filing taxes for the first time, but luckily there are already many resources and organizations that can help local governments through the Direct Pay process. See below for several Direct Pay resources and starting points:

 

(1) https://www.c40knowledgehub.org/s/article/Climate-action-and-the-Inflation-Reduction-Act-A-guide-for-local-government-leaders?language=en_US
(2) https://energycommunities.gov/energy-community-tax-credit-bonus/
(3) https://www.dol.gov/agencies/whd/IRA