The Inflation Reduction Act Changes the Game for Nonprofits and Local Governments

By Julia Damiano

Hot off the heels of the Federal Infrastructure Bill and the CHIPS and Science Act, the newly passed Federal Inflation Reduction Act (IRA), passed on August 12, 2022, is a nearly $400 billion legislative package that expands tax incentives and discounts for solar, electric vehicles and battery equipment, and other renewable energy resources. And for the first time, the new Law allows for non-profits and other tax-exempt entities to more directly take part in the savings with a new direct pay option.

Under the direct-pay option, non-profits, state entities, and municipalities can treat certain tax credits, like the Investment Tax Credit (ITC) and Production Tax Credit (PTC), as a payment and receive a cash refund. While there are some caveats, including that projects and equipment must comply with domestic content requirements, the IRA effectively allows tax-exempt entities to transfer credits for cash.

By utilizing the direct-pay option, tax-exempt entities can take part in numerous cash-saving provisions including a 30% base ITC on solar and standalone energy storage projects as well as the option to claim the PTC on solar projects in lieu of the ITC (more information on this below). Aside from solar, the IRA also creates a new Commercial Electric Vehicle Tax Credit and a Refueling Infrastructure Tax Credit, as well as a slew of energy efficiency incentives and rebates, as outlined below (all of which are available to tax-exempt entities).

Solar Tax Incentives

Some of the most considerable provisions in the IRA are geared toward solar. Most notable is the expansion of the ITC for solar projects beginning construction before January 1, 2025. The ITC now offers a base rate of 6%, and if Wage and Apprenticeship Requirements as set forth in the law are met, that can increase up to 30%.  There are also several “bonus” tax credits available when domestic content requirements are met, or when a project is in low-income communities, capping-out with what could be a 50% savings. Additionally, the IRA allows standalone energy storage projects and interconnection costs to be eligible for the ITC. The IRA reinstates the PTC for solar energy facilities. and for the first time since 2005, those developing solar projects, can claim the PTC instead of the ITC, depending on which is more lucrative. Similarly to the ITC, the PTC is a dollar-for-dollar reduction of tax liability. The main difference between the two is that the PTC generates credit for each kilowatt-hour produced for the first ten years of a project’s lifetime. The ITC, on the other hand, provides the full value of the credit upfront. The base PTC is 0.3¢ per kWh for projects greater than 1 MWac (megawatt alternating current). If the Wage and Apprenticeship Requirements are met, the PTC maxes out at 2.6c/kWh in 2022.

Electric Vehicle Tax Incentives

The IRA provides significant incentives for organizations looking to purchase electric vehicles. Under the Commercial Electric Vehicle Tax Credit, the IRA includes provisions for tax-exempt entities to purchase a qualified commercial clean vehicle and receive a tax credit of up to 30% of the cost of an eligible electric vehicle OR the incremental cost between the electric vehicle and a comparable internal combustion vehicle (whichever is less). Hybrid vehicles that have an internal combustion engine and at least a 15-kWh battery qualify for a 15% credit. The maximum credit amounts are based on the weight, with heavy-weight vehicles (over 14,000lbs) capped at $40,000, and light-weight vehicles (less than 14,000lbs) capped at $7,500. In addition to vehicle rebates, the IRA extends and expands the Refueling Infrastructure Tax Credit through 2032, and retroactively to the beginning of 2022, for electric vehicle chargers. Previously, the credit amount was capped at $30,000 per location. Under the IRA, the credit now max’s out at $100,000 or 30% of the cost per charger (whichever is less). Like other tax provisions in the IRA, the project must comply with the Wage and Apprenticeship Requirements, otherwise the base credit is only 6%. More information about electric vehicle-related tax incentives is expected to be released within the next few months.

Energy Efficiency Incentives and Rebates

Billions of dollars from the new law will support energy efficiency initiatives. These initiatives include a range of tax credits including credits for investing in affordable housing and constructing energy efficient buildings. One of the biggest changes coming out of the IRA is the expansion of the Commercial Buildings Energy-Efficiency Tax Deduction. Utilizing this credit, tax-exempt entities may be provided an immediate cost deduction on projects related to energy efficiency in commercial buildings. The IRA expands the deduction for qualifying efficiency improvements to a maximum of $5.00 per sq. ft. for new and existing buildings, up from $1.88 per sq. ft. (once again, assuming the Wage and Apprenticeship Requirements are met). The law also creates a sliding scale of credit amounts based on energy cost savings or energy usage. Unlike the ITC and the PTC, tax-exempt entities will not get this saving through a direct payment. Instead, the savings will be passed onto the architect, designer, or contractor working on the municipal/nonprofit building, and then passed onto the building owner.

In addition, the IRA also provides funding for several grant programs including:

  • Building Codes: $1 billion in grants to provide technical assistance to states and local governments in setting ambitious building codes.
  • Affordable Housing: $1 billion in U.S. Department of Housing and Urban Development loans to support efficiency and resiliency upgrades to affordable housing
  • Greenhouse Gas Emissions: $5 billion for greenhouse gas air pollution plans and implementation grants. This includes $250 million to support planning in each state and $4.75 billion in competitive grants awarded to states and municipalities.
  • Greenbank: $27 billion to the Greenhouse Gas Reduction Fund to create the country’s first national green bank. The fund will provide competitive financing to states and municipalities for climate-smart development. The Fund will also provide $7 billion to programs aimed at deploying clean energy, such as rooftop solar, in low-income and disadvantaged communities.

There are further funding and incentive opportunities in the other recently enacted federal and state legislation, and PowerOptions can help non-profits and public entities evaluate the options, plan for projects, and apply for funding. Please contact the PowerOptions team for any questions on the Inflation Reduction Act or other funding, and how you can get the most savings for your clean energy projects.

Don’t Miss the Webinar

To learn more about the IRA and how it can benefit your organization, join us at our next RAP-UP (September 26, 2022, at 11:00 am) as we break down the law in greater detail and outline the incentives and opportunities available to you.

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