How The Clean Energy Investment Tax Credit Works for Nonprofits

Please note that this should not be considered as tax advice, or be used as the sole source of information for purchasing, investment, or tax decisions.  Please consult with an accountant to confirm your organization's eligibility for federal or state tax credits or depreciation, which are highly dependent on an organization’s unique tax situation.

How The Clean Energy Investment Tax Credit Works for Nonprofits

The Clean Energy Investment Tax Credit (ITC) is a federal tax credit that subsidizes anywhere from 30%, to sometimes 70%, of the entire cost of a solar energy system.  This helps incentivize organizations to make more confident investments into clean energy as the industry continues to grow and scale, and provides a much quicker cost recovery period, so they can quickly begin experiencing the more organic savings associated with their avoided cost of power. 

Prior to January 2023, only tax-paying entities could benefit from the ITC, because as a tax “credit”, the solar system owner is required to have tax liability to offset. If a nonprofit wanted to purchase a system, because they had little to no tax liability, the ITC was unavailable to them, and the resulting prolonged time horizon to see a return on investment would usually be too impractical. That nonprofit’s only alternative would then typically be a third-party owned system; that is, a system funded, owned, and operated by a third party investor with the “tax appetite” to see the full effect of the ITC applied to their return on investment. That third party owner would then offer the nonprofit a discounted electricity bill, but the nonprofit’s monetary benefit would be substantially reduced compared to owning their own system.

With the passage of the Inflation Reduction Act, new mechanisms were created for tax-exempt organizations to receive the full value of the ITC directly, in spite of having little to no tax liability.  Eligible organizations include traditional non-profits and foundations, public schools, state colleges and universities, charities, cities and governmental entities including state, local and tribal governments, the Tennessee Valley Authority, and rural electric cooperatives, among others.  

This is accomplished in one of two ways: using the Direct Pay option, or the Transfer of Credit option.  Both of these methods are outlined below. 

Direct pay

Nonprofit organizations can now make a “Direct Pay” election on their tax filing following the solar system’s being placed-in-service, or installed and turned on. 

Unlike in the case of individuals and for-profit corporations, which can only apply the federal tax credit against their tax liability owed for any given year; the federal tax credit for non-profits now considers the ITC "fully refundable" for nonprofits, meaning eligibility is NOT tied to the amount of federal taxes the organization pays.  Instead, the tax-exempt organization is now treated as if it has paid taxes in order to qualify for the credit.  

In addition, the full value of the credit is issued as a lump sum.  This is in contrast with for-profits, who may need multiple years to fully recapture the ITC when offsetting their own tax liability. (ITC recapture is, in general, a 5-year period.  See this article for more details.)

Transfer of Credit

The Direct Pay election is the way the lion’s share of nonprofits will claim the ITC moving forward.  However, if for some reason the organization is not eligible for a direct payment, they may still “monetize” all, or a portion of, the tax credit value by working with a tax equity company.  Sussex Energy partners with various tax equity providers and will assist in this process.  Payments for the Transfer of Credit are not considered gross income for federal purposes, i.e. no federal taxes are owed on receiving the payment and no deduction is available to the tax credit buyer for making the payment.  Keep in mind that some of the value of the credit is lost in this type of transaction, usually 10-15%.

Conclusion

After the Inflation Reduction Ave was passed, the IRS issued their initial guidance, and then made subsequent clarifications detailing how these provisions for nonprofits would be placed into effect. As of 2024, the tax forms and guidance are solidified and being used successfully to full effect.

Tax exempt organizations now have a real opportunity to take advantage of one of the primary means for realizing substantial solar savings.  That gives them much greater flexibility in structuring the ownership and financing plans for their solar facilities, without relying as heavily on third-party ownership strategies. 

Now is the ideal time to implement a renewable energy solution for your organization. Please contact us at Sussex Energy to determine whether your organization and site is suitable for a solar investment.