The Inflation Reduction Act (IRA), which passed in 2022, contains major investments in clean energy through expanded tax credits. However, some key recipients of credits, like states, cities and nonprofits, do not pay taxes and thus cannot directly benefit from tax credits. Optima Tax Relief reviews new IRS guidance on what these tax-exempt groups need to do to access these clean energy credits.
Since the Inflation Reduction Act passed nearly a year ago, nearly $110 billion in new clean energy investments have been announced by private sector companies. However, many key groups have not been able to take advantage of these tax breaks, including states, cities, territories, tribes, local governments, and nonprofit organizations.
Now, these tax-exempt groups will be able receive credits at full value for their cleaning energy projects. A few key examples are schools that may purchase electric school buses or solar panels for their buildings. They will also receive the same privilege of “transferability,” a practice many for-profit companies use that involves selling their tax credits to third parties to access its full cash value. Transferability encourages greater utilization of tax incentives and fosters investment in various sectors. For example, a company that generates tax credits but has limited taxable income can sell or transfer these credits to another entity in need of the tax benefits. This creates a more dynamic marketplace for tax credits, facilitating the flow of capital into key industries and stimulating economic growth. The changes will yield remarkable results. For example, the new changes can assist over 900 rural electric providers deliver power to 32 million people in underserved areas.
Another major change in the new rules is a process called direct pay. Direct Pay is a groundbreaking provision introduced by the Inflation Reduction Act, offering taxpayers more direct access to the benefits of certain tax credits. Traditionally, tax credits have been applied against a taxpayer’s tax liability, reducing the amount of taxes owed. However, under Direct Pay, eligible taxpayers can receive the value of specified tax credits in cash, even if they have no tax liability. This is crucial for tax-exempt entities and government bodies like cities, schools, churches, tribes, and nonprofits that don’t pay income tax. Direct pay allows them to realize the full value of tax credits to reinvest in more clean energy projects.
The IRA expanded credits for solar, wind, geothermal, biomass and other renewables. It also boosted credits for energy storage, zero-emission vehicles, energy efficiency upgrades and electrification of buildings. The new IRS guidance confirms hundreds of billions in expanded credits can finance projects by tax-exempt organizations.
This is a major step in achieving the IRA’s goals of boosting clean energy nationwide. Cities and nonprofits can now pursue ambitious climate action and renewable energy goals with support from the landmark climate and energy law. Direct pay and transferability ensure these credits are maximized across the public, private, and nonprofit sectors to achieve our bold climate goals. The IRA makes tax credits more accessible, but also more complex. Taxpayers should always consult an expert to utilize these powerful new tools.
