From the Climate Activist newsletter
The Inflation Reduction Act (IRA) of 2022, one of the Biden administration’s signature climate achievements, includes a wonky but exciting opportunity for tax-exempt organizations to get tax credits for investing in climate-friendly infrastructure.
Businesses and homeowners that install solar panels, heat pumps, or other energy efficiency upgrades are eligible for tax credits, which are subtracted from taxes owed. Tax-exempt organizations like nonprofits, states, tribes, water districts and local governments are not eligible for tax credits since they don’t have enough taxable income. But with the Direct Pay Tax Credit feature of the IRA (also known as elective pay), these entities can now receive substantial tax credits in the form of reimbursements to help pay for capital-intensive projects like solar parking structures, fleet decarbonization or microgrid construction.
This report by the U.S. Conference of Mayors provides an overview about city-level projects for which credits are available. A complete list of the types of projects for which the IRA offers tax credits can be found here; the tax credits available to nonprofit entities have the footnote “Includes Direct Pay and Transferability.” Bonus credits can boost the percentage of the project paid for by tax credits from below 30% to as much as 70% if the project is in a low-income, tribal or fossil-fuel community, and is built using union labor and American-made materials.
Direct pay rules allow tax-exempt organizations to profit fully from tax credits and to avoid public-private partnerships that skim profit from the project for investors. Before the IRA they would have needed to partner with a development company, which may have retained ownership of part or all of the project. The IRA also connects organizations with bridge funding from the EPA’s Greenhouse Gas Reduction Fund (GGRF), which is cheaper than for-profit loans.
San Antonio, Texas began planning a multi-site solar array project in 2019. The IRA tax credits helped fund its construction. IRA rules also allowed the city to own the arrays outright, lowering future municipal expenses for residents.
The Baltimore nonprofit Groundswell partnered with the state and city and other nonprofits to build a solar-powered “resilience hub” with a battery backup – a community meeting place where vulnerable residents can come during power outages. Thanks to the IRA, Groundswell will receive all of the tax credit and will own the solar panels+battery system, reducing its future expenses and freeing up money to support its low-income programs.
Other examples of projects that are eligible for IRA direct pay credits can be found in the Local Actions Toolbox. As the IRA’s incentives roll out, it’s become apparent that there are especially good fits between certain types of tax-exempt entities and particular projects described in the Toolbox. For example, college campuses have been interested in installing multi-building geothermal heat pump systems to heat and cool several buildings at once. Nonprofits and local governments in Illinois, New York and Minneapolis have collaborated to build community solar projects that benefit low-income households. School districts in areas that often have power outages are building solar microgrids that can detach from the larger grid when it is down. Local governments that are trying to meet emissions targets by electrifying their vehicle fleets are applying for tax credits to buy EVs and to install charging stations.
Direct pay is one of the many ways in which the Inflation Reduction Act is a flexible, powerful system changer, using both technology and principles of equity to move towards a low-carbon future.