Under the Inflation Reduction Act (IRA), nonprofits — including public charities, private foundations, social welfare organizations, labor organizations, business leagues, religious or apostolic organizations, and public universities and hospitals — can now receive direct payments for a variety of clean energy-related federal tax credits. IRS guidance can help you leverage tax credits to subsidize energy-efficient investments in property your organization owns.
The monetization option
Section 6417 of the Internal Revenue Code allows so-called elective payments (another name for direct payments) for nonprofits and other “applicable entities.” These entities generally can make an election to treat an applicable credit as making a tax payment. If an entity doesn’t owe taxes, or the credit exceeds the amount due, the overpayment is issued to the organization as a refund.
The provision identifies a dozen “applicable credits.” They include credits for qualified commercial vehicles; investments in energy-efficient property, such as solar panel installation; construction of energy-efficient buildings; and energy-efficient improvements to existing property.
Specifically, the section allows credit for:
1. Alternative Fuel Vehicle Refueling Property,
2. Renewable Electricity Production,
3. Carbon Oxide Sequestration Equipment,
4. Zero-Emission Nuclear Power Production,
5. Clean Hydrogen Production,
6. Qualified Commercial Vehicles,
7. Advanced Manufacturing Production,
8. Clean Electricity Production,
9. Clean Fuel Production,
10. Clean Energy Property,
11. Qualifying Advanced Energy Project, and
12. Clean Electricity Investment.
Some of the credits have two components — a base amount, and bonus amounts for meeting certain labor-related requirements.
Proposed and temporary regulations
In 2023, the IRS released proposed and temporary regulations that provide guidance on the elective payment of applicable credits. Among other things, the regulations lay out rules for making the election and pre-filing registration requirements. For example, they require a nonprofit to make the election on its annual tax return no later than the due date for the original return (including extensions). Nonprofits won’t be able to do this on an amended return or through other types of administrative relief sometimes available.
But merely making the election isn’t sufficient — an election won’t be effective unless your organization has received a valid registration number for the relevant property and provided it with the tax return. You must obtain a registration number for each property for which you intend to make the election.
The temporary regulations describe the pre-filing registration process to be conducted through an IRS online portal. You must list all applicable credits your nonprofit intends to claim and each relevant property that contributed to the determination of such credits. Requisite information for each property includes the address and coordinates (longitude and latitude), supporting documentation, beginning-of-construction date, and placed-in-service date.
Notably, the receipt of a registration number alone doesn’t necessarily mean you’ll receive a payment. If you don’t have a number, though, your organization is ineligible to make the election. Further, registration is valid only for the tax year for which it’s obtained and must be renewed annually.
Getting started
The option to rely on this guidance to begin taking advantage of Sec. 6417 is welcome news. The pre-filing registration process and reporting requirements are complex, though.
You can rely on the proposed regulations for elective payments after December 31, 2022, for tax years that end before final regulations are adopted and published. You must, however, follow the regulations in their entirety and in a consistent manner for all elections made. Temporary regulations apply to tax years ending on or after June 21, 2023. Contact Hood & Strong if you have questions about how you can take advantage of these credits.
