The Inflation Reduction Act (IRA), which became law in 2022, provides billions of dollars to domestic companies for clean air initiatives. Notably, not-for-profit organizations also can reap tax rewards for going green — even if they have no tax liability for the year. Previously, only for-profit entities could use clean energy credits to offset taxable income.
Under the IRA, nonprofits claim tax credits using a "direct pay election." This election is available for tax years beginning after 2022, so long as a nonprofit files its tax return on time (including extensions). The election can't be made on an amended return. Recently, the IRS issued final regulations for claiming the credit.
The direct pay election applies to a baker's dozen of programs that were created or extended by the IRA. It's available to not-for-profits exempt from tax under Section 501(c)(3) of the Internal Revenue Code, as well as state and local government agencies, tribal governments, rural energy cooperatives, school districts, and some other entities with taxing authority.
The list of expenditures covered by the clean air initiatives may include:
Some examples of clean energy production projects are community geothermal wells, wind farms and solar arrays.
The most common clean energy tax breaks for nonprofits include the:
1. Commercial Clean Vehicle Credit. This credit, similar to the one offered to consumers, is available to for-profit and not-for-profit entities and covers purchases of certain electric vehicles (EVs) and plug-in hybrids. The credit equals 30% of the cost of qualified EVs (15% for plug-in hybrids) up to a maximum $7,500 for vehicles with a gross vehicle weight rating (GVWR) of less than 14,000 pounds. A maximum credit of $4,000 is allowed for used-vehicle purchases.
2. Energy-Efficient Building Deduction. Nonprofits may be able to take this deduction for installing energy-efficient improvements such as HVAC systems, lighting and building envelopes. Currently, the maximum deduction is equal to $5.65 per square foot of the entire building where improvements are made.
3. Energy Investment Tax Credit (EITC). This credit is a component of the overall Investment Tax Credit (ITC) and is available for investment in renewable energy systems. Such systems include solar energy and illumination, geothermal energy, geothermal heat pump equipment, qualified fuel cell, qualified small wind energy property, and qualified microturbine property.
4. Renewable Electricity Production Tax Credit (PTC). Your organization may be able to claim this credit for investment in electricity generated from renewable sources such as wind, solar, geothermal and biomass. Credit values are based on energy produced over the first 10 years of the facility's operation.
None of the four tax breaks are automatic. To qualify for an election, a nonprofit must pre-register with the IRS, submit information about the qualifying investment and file a tax return for the year the investment is placed in service. You'll likely need to provide information about your nonprofit, identify the tax benefits you're claiming, and attach documentation about the property or project.
Typically, elections are made on an organization's income tax return using Form 3800, "General Business Credit," and reporting the credits and IRS-issued registration number. If your organization normally isn't required to file a tax return, it should use Form 990-T, "Exempt Organization Business Income Tax Return," to make the election. The IRS typically issues credit payments after it approves submitted paperwork.
For many for-profit entitles, such as manufacturing and construction companies, these processes are old hat. But if, like most not-for-profits, your organization is new to tax breaks, it's best to seek tax advice. Tax professionals can help ensure you receive all the benefits to which you're entitled.
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