In general, tax credits do not mean much to tax-exempt nonprofit organizations because they do not pay taxes (typically). However, the programs created by the Inflation Reduction Act of 2022 (the Act) are accompanied by a new provision that will give nonprofits the opportunity to receive available new tax credits and “enable them to take an active role in building the clean energy economy, lowering costs for working families, and advancing environmental justice.”
How can an exempt organization claim a tax credit under the Act? The answer is through the new “Elective Pay” feature (also called “Direct Pay”), where organizations will, for the first time, be able to receive a payment equal to the full value of the tax credits. Unlike grant and loan programs, in which applicants may not receive an award, Direct Pay allows entities to receive their payment if they meet the requirements of both Direct Pay and the underlying tax credit. The steps to apply for Direct Pay are described in detail here; projects must first be completed and implemented, and then an organization must register with the IRS to obtain a registration number. This number will then be included with the tax return used to claim the credit (using form 990-T).
Organizations will be able to use Direct Pay for 12 of the projects included in the Act. For example, Direct Pay can be used for credits for the production of, or investment in, electricity from renewables or clean energy and for purchasing qualified commercial clean vehicles. A complete list of the 12 credits that are eligible for Elective Pay is available here. The complete guidebook to the Act’s programs is available here.
This article was written by Windes Nonprofit Tax Services Senior Manager Aaron Phillips.