Solar tax credits now available to tax-exempt entities

Solar tax credits now available to tax-exempt entities

For state and local governments, tribes, nonprofits and other tax-exempt entities, investing in solar energy is good for the communities they serve. Now, these governmental and tax-exempt entities can access federal tax incentives to help clean energy investments pencil out.

The Inflation Reduction Act of 2022 is the largest investment to address climate change in United States history, mainly through clean energy tax incentives. Recent guidance from the federal government clarified how entities that are not required to pay federal income tax can benefit from these tax credits on solar and other projects.

This summer, the U.S. Treasury and the Internal Revenue Service released information that defines a new elective pay mechanism—sometimes called direct pay—that enables tax-exempt entities to claim clean energy tax incentives.

“This is a big change that’s exciting for tribes and organizations like state and local governments, school districts and nonprofits that are a backbone of Oregon communities,” said Dave McClelland, senior program manager for Energy Trust of Oregon. “Direct pay levels the playing field so they can better fit solar into their budgets. Solar then reduces operating costs, which translates into benefits for the people they serve.”

Installing solar also enables entities to act on resiliency and sustainability goals. Adding battery storage supports community resilience by providing power during outages for essential buildings such as police and fire stations, gas stations, grocery stores, shelters and food banks. For new public buildings, solar projects with battery storage help meet the Oregon law that requires 1.5% of construction costs go toward green energy technology.

The Inflation Reduction Act makes solar investments even better by increasing the federal tax credit from 26% to 30% through 2032. The law also clarified that battery storage is eligible for the 30% tax credit.

Entities can combine the elective pay tax credit with other incentives or grants to stretch energy-investment dollars further. Energy Trust offers incentives for public entities and new buildings, and increased incentives for nonprofits and tribes, that help identify potential projects and make them more affordable.

How does elective pay work?

Taxpayers gain clean energy credits through their tax returns, but that hasn’t applied to tribes, local governments and nonprofit organizations, which don’t pay federal income taxes. Elective pay lets tax-exempt entities file a return for eligible clean energy projects, then use the elective pay option on the return to receive a tax-free payment from the IRS equal to the tax credit value.

A Low-Income Communities Bonus Credit is available for certain types of projects serving tribes and income-qualified communities.

Unlike a grant or loan, there’s no competition. Any entity that meets the requirements for elective pay and the applicable clean energy tax credit will receive the payment. Consult a tax professional for advice about how the law applies to your situation.*

The sooner you get started on clean energy projects, the sooner you can begin saving energy and money. But the tax credits are available until 2032, so you have time to plan your priorities and funding options.

The best way to see how a solar project pencils out for your organization? Request a bid. Qualified Energy Trust solar trade allies can provide customized bids with estimated incentives, tax credits, annual solar power generation and utility cost savings so you can see the net costs for a solar or solar + storage system. If you have specific questions related to your situation, email the Energy Trust solar team.

*Consult your tax professional to learn how tax credits and rules may apply to you. This information does not constitute tax advice and cannot be used to avoid tax penalties.