How Can Non-Profits and Government Entities Receive Energy Tax Credits with Elective Pay?

The Inflation Reduction Act (IRA) has introduced several significant updates to how government and nonprofit organizations can benefit from tax incentives related to clean and renewable energy initiatives. These changes have expanded the range of eligible entities and the scope of projects that can receive direct financial benefits. Understanding these provisions is essential for entities looking to leverage these incentives for their projects.

Elective Pay and Tax Credits

One of the key updates in the IRA is the ability for state, local, and Tribal governments, as well as nonprofit organizations and other tax-exempt entities like rural electric co-operatives, to elect to receive certain tax credits as direct payments. This is particularly beneficial for these entities since they generally do not have tax liabilities that can be offset by claiming tax credits, the traditional method of use.

Purpose of the Updates

The primary purpose of these updates is to stimulate investment in clean energy technologies across a wider array of economic actors, particularly those that have historically been unable to utilize tax-based incentives due to their tax-exempt status. By allowing these credits to be treated as direct payments, the IRA aims t

• Enhance the financial feasibility of clean energy projects in the public and nonprofit sectors.
• Drive broader adoption of sustainable practices and technologies.
• Support community-led revitalization and energy independence, especially in underserved or economically disadvantaged areas.

These measures align with the broader goals of the IRA to reduce carbon emissions, bolster energy security, and create economic opportunities through cleaner energy solutions.

Elective Pay can be used for which tax credits? (as of March 5, 2024)

• 30C - Alternative Fuel Vehicle Refueling / Recharging Property Credit
• 45 - Renewable Electricity Production Credit
• 45Q - Carbon Oxide Sequestration Credit
• 45U - Zero-emission Nuclear Power Production Credit
• 45V - Clean Hydrogen Production Credit
• 45W - Commercial Clean Vehicle Credit
• 45X - Advanced Manufacturing Production Credit
• 45Y - Clean Electricity Production Credit
• 45Z - Clean Fuel Production Credit
• 48 - Energy Investment Tax Credit
• 48C - Qualifying Advanced Energy Project Credit (48C) 
• 48E - Clean Electricity Investment Credit

For purposes of this article, we are going to highlight the Section 48 - Investment Tax Credit (ITC) and Section 45 - Production Tax Credit (PTC).

Overview of PTC and ITC

Energy Investment Tax Credit (ITC)

The ITC offers a tax credit, as a percentage of the cost basis, for installing renewable energy systems including the below systems:

• Solar equipment for energy generation or illumination
• Geothermal for energy generation or heating a structure
• Small wind energy
• Waste energy recovery
• Energy/thermal storage
• Electrochromic glass
• Combined heat and power
• Biogas property
• Microgrid controller

The credit is applied in the year the equipment is installed and can provide a significant benefit shortly after the renewable energy project is completed, reducing the ROI on the project.

Renewable Electricity Production Tax Credit (PTC)

The PTC provides a per-kilowatt-hour tax credit for electricity generated by eligible renewable energy resources including the below:

• Wind
• Closed and open loop biomass
• Geothermal
• Solar
• Small irrigation
• Municipal solid waste
• Qualified hydropower
• Marine and hydrokinetic

Taxpayers can receive benefits during the first ten years of a facility's operation. Historically, the PTC has been a critical tool  in the development of large-scale renewable energy projects in the U.S.

Elective Pay Option

The elective pay option allows eligible non-taxable entities to treat the PTC and ITC as refundable credits. This means that instead of reducing tax liability (which these entities do not have), they receive a direct payment from the IRS for the full value of the credits they generate. These entities must still meet all the regular qualifications for the PTC or ITC, such as using eligible renewable technologies and adhering to any specific installation and operational guidelines. This change makes renewable energy projects more financially feasible for a wider range of entities by providing immediate cash flow benefits.

Benefits

• Liquidity: Provides financial returns to project owners soon after the project is complete, improving the economics of projects that might otherwise be financially unviable.
• Inclusivity: Enables a broader array of entities to participate in the renewable energy economy, spreading the economic and environmental benefits of renewable energy more widely.
• Promotion of Equity: Particularly empowers communities and organizations that have been underserved by previous energy policies, including rural and Indigenous communities.

Implementation Challenges

• Complex Coordination: Requires coordination between multiple federal agencies and the entities themselves, potentially complicating the application and payout processes.
• Complex Rules: Compliance with many nuanced rules for these technical tax incentives which are often updated or expanded upon through new rules and guidance published by the IRS.

Application Process for Elective Pay

There is an application process for eligible entities to receive elective pay under the Inflation Reduction Act (IRA) for tax credits like the Production Tax Credit (PTC) and Investment Tax Credit (ITC). This process has several steps that ensure that projects qualify under the new provisions and that the entities are eligible to receive payments. Here’s a general overview of the process:

Step 1: Determine Eligibility

The first step for any organization who is considering elective pay is to determine eligibility. Eligible entities include:

• State, Local, and Tribal Governments: This includes all levels of subnational government entities.
• Nonprofit Organizations: Entities that operate on a not-for-profit basis and are engaged in appropriate renewable energy projects.
• Other Tax-Exempt Entities: This can include rural electric cooperatives and similar organizations.

If an organization does not meet the above criteria, it’s likely they can still claim the credits through the traditional methodologies of a tax credit. In the case they do not have the tax liability to offset, these credits can be transferred or sold.

Step 2: Project Qualification

Projects must meet the requirements for the PTC or ITC, which include:

• Renewable Energy Technologies: The project should involve eligible technologies such as solar, wind, geothermal, biomass, and others as specified by the tax credits.
• Installation and Operational Standards: Projects must adhere to the installation timelines and operational standards required to qualify for the credits.
• Add-on/Bonus Credits: Determination and tracking of eligibility for add-on credits, such as domestic content, prevailing wage, and apprenticeship requirements.

Step 3: Application Preparation

Entities must gather and prepare necessary documentation to prove their eligibility and the eligibility of their projects. This documentation may include:

• Technical Specifications: Details of the renewable energy systems and proof that they meet the required federal guidelines and standards such as size or property type.
• Financial and Organizational Documentation: Proof of tax-exempt status, project ownership, and other legal and financial details that support the application.
• Credit Calculation: A proper calculation is needed in order to finalize the credit amount. This calculation should be done by experienced energy tax credit professionals.

Step 4 Pre-registration: 

To receive the credit, applicants must complete the pre-registration process with the IRS. This will include providing:

• general information about the applicant, 
• the credits the applicant intends to earn, 
• The eligible project/property that will contribute to the credit

Once completed, the IRS will review and provide a registration number for each applicable credit that is approved. The registration number will be applied to the appropriate tax return filing for that year. Organizations follow the below guidelines to ensure a smooth process:

• Completing the pre-registration process after the eligible property for the credit has been placed into service and all costs are finalized.
• Completing the pre-registration process well before the deadline for your tax filing, to ensure sufficient time for the IRS to review and provide a valid registration number.
• For additional questions, the IRS has provided common IRS FAQs for more information about the pre-filing process.

Step 5: Submit Tax Filing

Once the pre-registration number has been received, applicants must prepare their corresponding tax form to be submitted. For many entities who don’t normally file, this may be Form 990-T. These tax filings are conducted similarly to prior years, but will include the pre-registration number for the credit. In addition, any applicable worksheets must be included such as Form 3468 for ITC and Form 8835 for PTC.

Step 6: Await Approval and Receive Payment

Once the tax filing is submitted, it will be processed and approved by the IRS. Payment equivalent to the value of the tax credits generated by the project will be issued directly to the entity through a check from the U.S. Treasury. The timing of these payments will depend on the volume of submissions and IRS processing timelines.

Conclusion

The elective pay option in the Inflation Reduction Act represents a significant policy shift designed to democratize access to renewable energy incentives. By converting these tax credits into direct payments, the IRA enables non-taxable entities to directly benefit from their investments in renewable energy, thereby encouraging sustainable development and helping to achieve broader energy policy goals focused on increasing renewable energy capacity and reducing carbon emissions nationwide. This move aligns with broader fiscal strategies to stimulate the clean energy sector and promote energy independence.

Our team is currently working with all organization types eligible for the tax incentives implemented through the Inflation Reduction Act. If you are interested in participating in the elective pay program or are curious to see if your project is eligible, contact TaxTaker to speak with an Inflation Reduction Act expert.