How the Clean Energy Tax Credits Work for NFPs

By Amy O’Loughlin, CPA

On August 16, 2022, the Inflation Reduction Act (IRA) was signed into law to provide, among other measures, an investment of $369 billion for clean energy and climate change programs for the next 10 years. The tax incentives provide a significant portion of the investment within the Act. There are incentives for consumers, businesses and nonprofits. For businesses and nonprofits, there are both clean electricity production tax credits (PTC) and investment tax credits (ITC). The production tax credits subsidize the production of clean electricity. The investment tax credits support new investment in clean electricity installations. A given project can receive either a production tax credit or an investment tax credit but not both.

Within the investment and production tax credits, three bonus credits add to the base credit amount. For both Investment and Production credits, there is an incentive if the projects are built with domestically produced materials. Projects sited in “energy communities” are areas that have suffered from the decline of fossil fuel energy. There is a map released by the U.S. Department of Energy that identifies these energy communities. Finally, if the project is in a community classified as a “qualified low-income residential building project” or a “qualified low-income economic benefit project,” there is a 10 to 20% increase in the credit.

The types of projects that are eligible for the clean energy tax credits are the production of electricity from eligible renewable sources, including wind, biomass, geothermal, solar, small irrigation, landfill and trash, hydropower, marine and hydrokinetic energy (IRC §45, pre-2025). The technology-neutral tax credit to produce clean electricity replaces IRC §45 for facilities that begin construction and are placed in service after 2024. The Act established technology-neutral tax credits for clean electricity facilities placed in service on Jan. 1, 2025, or later. The credits apply to facilities with net-zero greenhouse gas emissions and will succeed the IRA's existing production tax credit (PTC) and investment tax credit (ITC) for qualifying wind and solar projects. In addition, qualified energy storage facilities will be able to receive the new technology-neutral ITC if they enter service in 2025 or later. The Investment Tax Credit for energy property (IRC §48, pre-2025) provides incentives for investment in renewable energy projects including fuel cell, solar, geothermal, small wind, energy storage, biogas, microgrid controllers and combined heat and power properties. From 2025 onwards under IRC §48E, technology-neutral tax credits are available for investment in facilities that generate clean electricity and qualified energy storage technologies. This replaces §48 for facilities that begin construction and are placed in service after 2024. There are bonus credits that can be layered on for projects that include small-scale solar and wind or clean electricity on Indian land, federally subsidized housing, in low-income communities and benefit low-income households.

There are credits for purchasers of commercial clean vehicles. Qualifying vehicles include passenger vehicles, buses, ambulances and certain other vehicles for use on public streets, roads and highways. To support the use of clean vehicles, there are refueling property credits located in low-income and non-urban areas. Qualified fuels include electricity, ethanol, natural gas, hydrogen and biodiesel.

A special feature of the Clean Energy Tax Credit program is elective pay. Elective pay allows tax-exempt and governmental entities that would otherwise be unable to claim the credits because they do not owe federal income tax, to treat the amount of the credit as a payment of tax and apply for a refund. Tax-exempt and government entities that qualify can file an annual tax return with the IRS to claim elective pay for the full value of the investment tax credit if it meets all the requirements including a pre-filing registration requirement. The elective pay election would be claimed on the entity’s annual tax return along with any form required to claim the relevant tax credit.

To receive elective pay, the following requirements must be met:

Identify and pursue a qualifying project or activity.
Determine the entity’s tax year. The tax year will determine the due date for the tax return.
Complete pre-filing registration with the IRS. The registration requests information about the organization, which credits will be earned, and the project or property that will contribute to the credit. The IRS will issue a registration number for each project or property. The registration number will be included on the organization’s tax return as part of making the elective pay election.
Satisfy all the requirements for the tax and bonus (if any) credit for the tax year. There will be documentation requirements to properly substantiate the credit and bonus.
File the annual return by the due date or extended due date and make a valid elective payment election.

The IRS has provided Publication 5884, IRA and CHIPS Pre-Filing Registration Tool User Guide to assist with pre-filing registration. As with any new law, a careful reading of the IRS regulations and Frequently Asked Questions (FAQ) guidelines is required to understand the processes and procedures that must be followed to receive the elective pay funds.

If an entity is not eligible for elective pay but does qualify for a clean energy tax credit, the organization can transfer its tax credit amount. The credit can transfer to a third-party buyer in exchange for cash. The buyer and seller would negotiate and agree to the terms and pricing.

A final important caveat for tax exempt organizations who are considering capital campaigns or specific donation requests to raise funds for clean energy projects, the tax credits available may be limited.

Grants from government, private foundation or individuals and forgivable loans received to fund the purchase of investment-related credit property should be included in the basis of the property for the purpose of calculating the credit. However, the final regulations prevent an entity from obtaining an excess benefit. Meaning if the organization receives a grant or forgivable loan for the specific purpose of purchasing, constructing, reconstructing, erecting or otherwise acquiring an investment-related credit property (a restricted tax exempt amount), and the sum of any restricted tax exempt amounts plus the applicable credit otherwise determined with respect to that credit property exceeds the cost of the investment-related credit property, then the amount of the applicable credit is reduced so that the total amount of applicable credit plus the amount of any restricted tax exempt amounts equals the cost of investment-related credit property.

The excess benefit rule, however, does not apply if a tax-exempt amount is not received for the specific purpose of purchasing, constructing, reconstructing, erecting, or otherwise acquiring a property eligible for an investment-related credit. See the IRS Elective pay and transferability frequently asked questions: Elective pay.

Amy O’Loughlin has been in public accounting since 2002 and is a tax director in the CBIZ financial services division. She provides compliance and consulting services for all types of exempt organizations. She is an ASCPA member and serves on the ASCPA’s editorial committee.

To receive elective pay, the following requirements must be met:

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