Direct Pay Through the Inflation Reduction Act

 

What is Direct Pay from the irs (Elective Pay)?

 

The Inflation Reduction Act (IRA) has introduced and expanded tax credits for clean energy technologies, offering unprecedented policy certainty and opportunities for entities involved in manufacturing, installing, and producing clean energy over the next decade. Beyond incentivizing private-sector investment, the IRA includes transformative provisions enabling tax-exempt and governmental entities—such as states, local governments, Tribes, territories, and nonprofits—to actively contribute to building the clean energy economy, reducing costs for working families, and advancing environmental justice.

For the first time, thanks to the IRA’s “elective pay” (commonly referred to as “direct pay”) provisions, these tax-exempt and governmental entities can receive a cash payment equivalent to the full value of IRS tax credits for qualifying clean energy projects. Unlike competitive grants and loan programs, where applicants may not receive an award, direct pay guarantees payment if the requirements for both direct pay and the underlying tax credit are met.

Eligible entities can utilize the IRA’s tax credits for a variety of clean energy initiatives, including:

  • Generating clean electricity through solar, wind, and battery storage projects
  • Building community solar projects that provide clean energy to local families
  • Installing electric vehicle (EV) charging infrastructure
  • Purchasing clean vehicles for state or city fleets

 

 

Tax-Exempt Entities

 

  • 501(c)(3) organizations such as public charities, private foundations, schools, hospitals, houses of worship, and others
  • Religious or apostolic 501(d) organizations
  • All other organizations exempt under section 501(a) of the tax code

 

Why apply for direct pay?

Direct pay can enable nonprofits to afford the installation of clean energy systems, helping them reduce their own energy costs and allocate more resources towards their mission. By installing clean energy technologies, nonprofits can also become local climate leaders, using their property to generate clean electricity that benefits their community through their valuable initiatives.

 

Example: EcoRun, a 501(c)(3) nonprofit, has a large roof on its headquarters and wants to install solar panels to power the building. Through direct pay, EcoRun can receive up to 60% of the installation cost back through the Investment Tax Credit (with additional bonus credits included).

 

 

State, Local, and Territorial Governments

 

  • States
  • U.S. Territories
  • Political subdivisions including cities, counties, municipalities, townships, and villages
  • Agencies and instrumentalities of state, local, or territorial governments, including water districts, school districts, economic development agencies, and certain public universities and hospitals

 

Why apply for direct pay?

Direct pay can simplify the process for local governments to invest in clean energy, enabling them to undertake larger projects more quickly and demonstrate climate leadership. By deploying more clean energy within local communities, direct pay advances environmental justice, helps residents save money, reduces harmful pollution, and improves public health.

 

 

 

Tribal and Native Entities

 

  • Federally recognized Tribal governments, their subdivisions, and their agencies
  • Alaska Native Corporations

 

Why apply for direct pay?

Direct pay can assist Tribes in bringing clean energy to their communities, ensuring power and transportation that are affordable, reliable, and resilient against climate-induced extreme weather. Clean energy reduces harmful pollution, enhances public health, and supports Tribes in boosting their energy sovereignty and independence.

 

Example: A federally recognized Tribe plans to build a solar array to power their community center. Through direct pay, the Tribe can receive up to 30% of the capital cost back through the Investment Tax Credit. Additionally, the Tribe may qualify for up to 20% more off the capital cost through the Low-Income Communities Bonus Credit program, provided they apply for and receive an allocation under this program. For more information on applying for the Low-Income Communities Bonus Credit Program, please contact us.

 

 

 

Rural Energy Cooperatives

 

  • Any corporation operating on a cooperative basis that works to provide electricity to rural communities
  • Tennessee Valley Authority

 

 

Why apply for direct pay?

Direct pay can simplify the process for rural electric co-ops to invest in clean energy, create jobs, and stimulate economic opportunity, all while continuing to provide affordable, reliable electricity to rural communities.

 

Example: The Geothermica Co-op is completing the construction of a geothermal well to supply electricity to a rural area. Through direct pay, Geothermica can receive up to 2.75 cents per kilowatt-hour of electricity produced from the geothermal well through the Production Tax Credit. Additionally, because Geothermica Co-op is located in an energy community, it might qualify for an extra 10% increase in the Production Tax Credit under the Energy Communities Bonus Tax Credit.

 

How does our organization apply for IRS direct pay?

Entities wishing to claim direct pay should follow these steps:

  • Identify the Project and Credit: Work with our experienced team to identify the project and the tax credit you want to pursue.
  • Maximize Your Credit Opportunities: Take full advantage of all available incentives to enhance your benefits.
  • Complete the Project: We assist in completing your project, placing it into service, and determining the corresponding tax year.
  • Determine Tax Return Due Date: You decide when your tax return will be due.
  • Pre-Filing Registration: Complete the pre-filing registration with the IRS before your tax return is due.
  • File Your Tax Return: Once you receive a valid registration number, file your tax return by the due date, including any extensions.
  • Receive Your Payment: Receive your cash direct payment from the IRS.

 

Here’s a sample timeline for claiming direct pay for

most organizations with a calendar tax year*:

 

 

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Have additional questions? CONTACT US to learn more.