Energy tax credits mean cash for exempt organizations

| 12/22/2022
Energy tax credits mean cash for exempt organizations
In summary
  • The more than $300 billion in energy tax incentives included in the Inflation Reduction Act of 2022 (IRA) could mean cash for tax-exempt organizations.

The IRA includes more than $300 billion in energy tax incentives designed to combat climate change. The IRA made several taxpayer-favorable changes to existing energy tax incentives and added new incentives. For instance, the new law increased the amount of many existing energy tax credits, expanded the types of activities eligible for energy tax credits, and extended the time that the credits will be in effect.

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Direct pay

The IRA also added Section 6417, which allows applicable entities to elect to make eligible credits refundable, allowing for a direct payment of the amount of the credit. The definition of “applicable entities” includes tax-exempt entities and certain governmental and quasi-governmental entities. Accordingly, tax-exempt organizations may take advantage of these incentives and monetize the credits through the direct pay election under Section 6417, regardless of whether they have unrelated business taxable income. The direct pay option is effective for tax years beginning after Dec. 31, 2022.

For tax-exempt entities, the IRA direct pay option alleviates a longtime obstacle to participating in climate-friendly activities encouraged by these credits. Before the IRA’s direct pay option, it was more expensive for tax-exempt organizations to take advantage of energy-saving technologies than for-profit taxpayers because tax-exempt organizations generally have little or no tax to offset against tax credits.

Crowe observation

While for-profit organizations’ tax credits lowered the cost of adopting energy-saving technology, not-for-profit organizations were required to pay the full cost because they were unable to take advantage of the credits. The IRA addresses this unfairness and opens the door for more taxpayers to engage in climate-friendly activities.

Expansion of IRC Section 179D for nongovernmental exempt organizations

The IRA modifies, expands, and extends the energy-efficient commercial buildings deduction under IRC Section 179D. In particular, the IRA reduces from 50% to 25% the amount by which a building must increase its efficiency to qualify for the deduction.

The IRA also extends eligibility for the deduction to allow all tax-exempt entities to allocate the Section 179D deduction to the designer of the energy-efficient property. Prior to the IRA, only government entities were allowed to allocate the Section 179D deduction to the designer of the property.

Crowe observation

The IRA added IRC Section 6418, which allows eligible taxpayers to transfer certain energy tax credits for cash. Applicable entities under IRC Section 6417(d)(1)(A) are not eligible entities. Therefore, tax-exempt entities cannot transfer energy credits for cash under the provisions of IRC Section 6418.

Incentives exempt organizations should consider

While the legislation is new and the IRS has issued multiple notices requesting comments on various aspects of energy tax benefits while drafting its proposed regulations and guidance, many exempt organizations, in their year-end planning efforts, already have begun to take advantage of these incentives. In particular, the following provisions have had the most traction among exempt organizations:

Code section/provision/

Common energy property 

Timing

2022 vs. 2023

Opportunity

Section 30C: Alternative fuel vehicle refueling property tax credit

Property for recharging electric motor vehicles

Qualifying property placed in service before Jan. 1, 2033

Beginning after Dec. 31, 2022, only property placed in service within a low-income or rural census tract area is considered qualified property.

Maximum credit of $100,000 is to be calculated per single unit.

Base credit is 6%, with increases to 30% if prevailing wage and apprenticeship requirements are met.

Section 48: Energy credit

Solar, wind, geothermal, cogeneration, fuel cell, and similar technology and energy storage technology (batteries), qualified biogas property, and microgrid controllers

Property on which construction begins before Jan. 1, 2025

The potential increase of 10% or 20% is available only for property placed into service after Dec. 31, 2022.

Base credit is 6%, with increases to 30% if prevailing wage and apprenticeship requirements are met.

Credit potentially can be increased by 10% or 20% if certain domestic content requirements are met and the property is located in energy or low-income communities.

Section 179D: Energy-efficient commercial building deduction

Installation of building systems that reduce the total energy and power costs by 25%

Building envelope, interior lighting systems, and heating, cooling, ventilation, and hot water systems

Qualifying property placed in service in tax years beginning after Dec. 31, 2022

Deduction is not available to exempt organizations for property placed in service in tax years beginning before Jan. 1, 2023.

Base is $0.50 per square foot, and the deduction is increased $0.02 for each percentage point in energy efficiency, up to $1 per square foot.

An increased deduction of $2.50 per square foot, which increases by $0.10 for each percentage point, is available if prevailing wage and apprenticeship requirements are met, with a maximum deduction of $5 per square foot.

Looking ahead

The IRA levels the playing field for tax-exempt organizations by providing them with an opportunity to participate in climate-friendly activities without having to pay a surtax that eligible for-profit entities do not have to pay. Tax-exempt entities should review these and other provisions with their tax advisers to see how they can unlock these opportunities and potentially save money by adopting modern, energy-saving technologies. It is important for organizations to consider whether such incentives should be taken in 2022 or future years to maximize the opportunities available.

Related topics

The 2022-2023 Priority Guidance Plan released by the U.S. Department of the Treasury and the IRS includes 10 projects focused on exempt organizations.
Recently released revised draft instructions could make it easier for partnerships and S corporations to take advantage of the domestic filing exception.
The 2022-2023 Priority Guidance Plan released by the U.S. Department of the Treasury and the IRS includes 10 projects focused on exempt organizations.
Recently released revised draft instructions could make it easier for partnerships and S corporations to take advantage of the domestic filing exception.

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