Inflation Reduction Act Unlocks New Cash Benefits for Tax-Exempts

President Biden signed the Inflation Reduction Act (IRA) — the centerpiece of his administration’s climate agenda — in August 2022. The legislation contains a host of new tax incentives aimed at spurring clean energy investment and production, including for tax-exempt organizations.

Recognizing the vital role that state and local governments and nonprofits play in advancing renewable energy, the IRA gives these entities an unprecedented opportunity to monetize federal tax credits in the form of cash refunds.

While guidance is still needed from the IRS and Treasury to fully implement the program, tax-exempts should assess these benefits now as a potential means to supplement their clean energy efforts.

Elective payment option

The IRA created Internal Revenue Code Section 6417, effective for tax years beginning after December 31, 2022. Section 6417 allows an “applicable entity” to make an election to treat an “applicable credit” as a payment against federal income tax. An applicable entity means:

• Any organization exempt from federal income tax,
• Any state or political subdivision thereof,
• The Tennessee Valley Authority,
• An Indian tribal government,
• Any Alaska Native Corporation, or
• Any corporation operating on a cooperative basis engaged in furnishing electric energy to persons in rural areas.

Since these entities do not typically pay federal income tax, the thrust of Section 6417 is to turn applicable credits into cash payments from the government.

The credits eligible for refund are:

• Section 30C — Alternative fuel vehicle refueling property credit
• Section 45 — Electricity produced from certain renewable resources, etc.
• Section 45Q — Credit for carbon oxide sequestration
• Section 45U — Zero-emission nuclear power production credit
• Section 45V — Credit for production of clean hydrogen
• Section 45W — Credit for qualified commercial clean vehicles
• Section 45X — Advanced manufacturing production credit
• Section 45Y — Clean electricity production credit
• Section 45Z — Clean fuel production credit
• Section 48 — Energy credit
• Section 48C — Advanced energy project credit
• Section 48E — Clean electricity investment credit

Each credit above contains its own rules regarding qualification and quantifying the benefit. Also, several of the credits are only available once the qualifying assets are placed in service, and that can require technical analysis. Therefore, tax-exempts must evaluate the specifics of each credit.

When must elections be made?

Elections for tax-exempts other than governmental entities must be made by the due date (including extensions) of the tax return for the taxable year for which the election is valid, but in no event can the election be made earlier than 180 days after the enactment of the IRA (August 16, 2022). Treasury still needs to set forth the due date of the election for governmental entities that are not required to file a tax return. In all cases, elections will be irrevocable once made.

Guidance still needed

Section 6417 left several important questions unanswered:

• The exact manner for making refund elections
• How eligibility for applicable credits will need to be substantiated
• Whether activities with for-profit partners are eligible for credit or refund
• Whether tax-exempts must register their refunds with the IRS
• What sort of periodic support may need to be submitted for projects that generate credits over multiple years

The joint IRS and Treasury 2022 – 2023 Priority Guidance Plan indicates that guidance addressing credit monetization under Section 6417 is under consideration. As part of the guidance process, IRS and Treasury will look for comments from organizations with activities that may potentially qualify for benefits under Section 6417. Tax-exempt organizations should consider what guidance would be most helpful and consider submitting comments to IRS and Treasury during the initial guidance process.

How we can help

By combining our nonprofit and government experience with our federal tax strategies practice, CLA is well positioned to help tax-exempt organizations navigate and capture these valuable new energy credits.

Contact us to learn how we can assist your organization in monetizing its clean energy initiatives.