News for nonprofits throughout East Tennessee who have added or need clean energy upgrades like solar: the Internal Revenue Service has released new details to explain Direct Pay reimbursement. This is a new benefit of the Inflation Reduction Act, which allows nonprofits to receive the same benefit that businesses receive in tax incentives for renewable energy. These nonprofits can be a local government like a city or county, or any organization that normally does not have to pay taxes, from a church to a school or other community group.
Here’s what the IRS is saying about what it is calling Elective Pay (better known as Direct Pay, but a term the IRS also has used to define paying taxes directly from your bank account, which has nothing to do with the new energy incentives) and Transferability, specifically answering the question “Are tax-exempt organizations eligible?”
“Organizations that are exempt from tax by § 501(a) are eligible for elective pay. This would include all organizations described in § 501(c), such as public charities, private foundations, social welfare organizations, labor organizations, business leagues and others. It also includes religious or apostolic organizations under § 501(d).”
The IRS says the process of obtaining the Direct Pay or Elective Pay includes:
- EIN or TIN needed for registration
- Project placed into service
- Form 990-T filing plus any other form needed to claim the relevant tax credit
- Electronic filing is required
- Lots of fine print about percentages, including that projects under a megawatt are not subject to the same requirements as others. Most analysts have anticipated a 30% Direct Pay reimbursement. Some entities could receive less or more than that.
Rural Electric Cooperatives are another type of tax-exempt entity that qualifies for the Elective Pay or Direct Pay. Some details for them are here.
In addition to Direct Pay for nonprofits, the IRS also has guidance for taxpayers who may qualify to transfer tax credits to another entity.
In case your nonprofit is ready to start tackling the paperwork involved, be aware that the IRS wants to take a little longer to share the details: “More information about the pre-filing registration process will be available when the process is released later in 2023.” We’ll keep you posted. As always, consult your tax advisor.
Anne Brock is marketing coordinator for Solar Alliance. She can be reached at: 865-221-8349 or abrock@solaralliance.com