The new direct-pay option within the Inflation Reduction Act allows non-taxable entities such as schools, nonprofits, churches, and local governments to take advantage of the full 30 percent federal renewable energy refundable tax credit to afford projects like PV solar, geothermal, wind, EV vehicle purchases, and battery storage.
Listen in to this Q&A discussion hosted by Winneshiek Energy District in March 2023:
Presentation slides available here.
Highlights
Two Options
- 501(c)3 Nonprofits can either pay for projects up front (direct ownership) and apply for the value of the 30 percent tax credit at tax time; OR
- Develop a Power Purchase Agreement to allow non-taxable entities to work with a taxable investor to capture the value of the tax credit.
Organizations will apply for the 30 percent base tax reimbursement (likely at tax time) for the value of the tax credit. Credits are valid for next 10 years with a non-competitive application process (unlimited program funding).
Direct Ownership Basics
User builds and finances a solar array to offset a certain share of organization’s electric use
- Tax-exempt organizations like 501(c)’s, schools, state, local and tribal governments, and RECs are now eligible for direct pay reimbursement of the 30% tax credit
- Relatively straightforward process: Solicit contractor bids and select contractor, project build, submit documentation at tax time for reimbursement of value of credit
- Simple payback of about 7 years (Alliant customers) or about 10 years with MiEnergy
- Works great for organizations that can fund projects upfront-financing can lengthen payback period significantly
- Iowa school districts: Budget wall between operational funds and capital expenditures- freeing up of energy costs in operational budgets makes solar very attractive
- For large commercial users subject to demand charges and low per/kWh energy rates, solar might not make financial sense, even with ITC!
"Adders"
Direct investment projects may also be eligible for 10-percent or 20-percent "Adders": Yearly adder-specific production caps. Applicant applies for adders but is not guaranteed to receive one (yearly nationwide production/ dollar caps). Some adders can be stacked, with a maximum total (including 30 percent base credit) not to exceed 70 percent of project cost.
Stackable Credits: Projects may qualify for both these additional "adder" programs.
- Energy Community (10 percent): Project built on brownfield site or on census tract on which a coal mine/coal power plant closed after 1999 or area that has (or had at any time during the period beginning after Dec. 31, 1999) significant employment or local tax revenue related to the extraction, processing, transport or storage of coal, oil, or natural gas
- Domestic Content (10 percent): Projects must certify that any steel and iron or any manufactured product that is a component of the facility was produced in the US. Construction material made primarily of steel or iron must be 100 percent produced in the US, but this does not apply to steel or iron used as components or subcomponents of other manufactured products.
Low-Income Communities Bonus Credits: Projects may qualify for only 1 "adder" from this group
- Low-income Community (10 percent): Project in census tract where household poverty rate is at least 20% or where median household income does not exceed 80% of statewide median income
- Tribal lands (10 percent): Project located on tribal land pursuant to 25 US Code 3501(2)
- Low-income residential project (20 Percent): Multifamily rental housing classified under section 236 of the National Housing Act
- Low-income economic benefit project (20 percent): At least 50 percent of the financial benefits of the electricity produced by such facility are provided to low-income households
About Solar Power Purchase Agreements (SPPAs)
- AGREEMENT OF THE LLC TO INSTALL AND MAINTAIN THE SOLAR SYSTEM FOR THE TERM OF THE CONTRACT
- AGREEMENT OF THE NON-TAXPAYER TO PURCHASE ALL OF THE POWER PRODUCED
- RIGHT OF THE NON-TAXPAYER TO “CALL” THE CONTRACT AND NEGOTIATE TO BUY THE SYSTEM AFTER THE TAX BENEFITS ARE EXHAUSTED (But buyout price cannot be agreed in advance)
- AGREEMENT OF THE LLC TO REMOVE THE SOLAR INSTALLATION AT THE END OF THE CONTRACT (UNLESS BOUGHT OUT)
SPPAs: Where the Gains Are
TO THE NON-TAXPAYER:
- PURCHASES POWER AT BELOW-UTILITY RATES UNTIL BUYOUT
- BUYS THE SYSTEM AT LESS THAN ORIGINAL COST
- PAYS 0₵ PER KWH AFTER BUYOUT
- HAS TO PAY FOR INSURANCE AND MAINTENANCE
TO THE INVESTOR:
- RECEIVES MONTHLY INCOME UNTIL THE BUYOUT
- RECEIVES TAX CREDIT
- HAS TAX LOSSES (i.e., tax reductions) FROM SYSTEM DEPRECIATION
- RECEIVES PAYMENT FOR THE BUYOUT
Commercial Clean Vehicle Tax Credit
Tax-exempt organizations that buy a qualified commercial clean vehicle may qualify for a clean vehicle tax credit of 30 percent up to $7,500.
- Applies to pure electric vehicles and plug-in hybrids with batteries 7 kW or larger
- Battery and critical mineral sourcing rules of the personal EV tax credit do not apply to the commercial clean vehicle tax credit!
- EV charging infrastructure tax credit: 30 percent up to $1,000
NOTE: IRA terms and regulations continue to evolve as programs are launched. Nonprofits should verify eligibility with qualified lenders and tax professionals prior to investment.