IRA impact on tax-exempt organizations

The Inflation Reduction Act (IRA) includes a wide range of tax credits designed to facilitate a transition to cleaner energy production and encourage the use of clean vehicles to reduce greenhouse gas emissions through the use of alternative fuels and energy-efficient technologies. While many of these credits have previously been only available to for-profit entities, the IRA created an opportunity for tax-exempt organizations to receive cash payments from the government when making investments in projects promoting clean energy and energy efficiency. Since the passage of the IRA, many tax-exempt organizations including state and local governments, tribal governments, not-for-profits, colleges and universities, healthcare organizations and others have been reviewing their potential investment in qualifying energy projects. This article will focus on what we have learned since the IRA was signed into law.

Organizations with a comprehensive plan will be better positioned to maximize these energy tax credits. From a high-level perspective, the following questions may assist in determining whether the IRA may benefit your tax-exempt organization:

• Are you considering a new construction project or renovations where you may be changing the use, consumption, energy efficiency or storage of energy?
• Are there deferred maintenance projects being contemplated?
• Does your organization have an environmental, social and governance (ESG) strategy driving future capital investments?
• Are you planning or currently executing a project to enhance heat or carbon capture, utilize wind, solar or hydro power, or harness biogas to make heat, electricity, or a transportation fuel?

Now is when tax-exempt organizations should be looking at deferred maintenance and other capital projects to determine whether the projects contain qualifying properties which may be eligible for the credit or could be adjusted to maximize the benefit. We have seen significant opportunities with solar projects, whether they are rooftop solar panels or larger offsite solar projects. Organizations investing in electric vehicles, electric vehicle charging stations or upgrading their energy systems, whether combined heat and power or other power generation, are also seeing opportunities. Replacing windows in buildings may also qualify for an energy credit.

Most of the IRA tax credits are available through 2032, but it is important to note that both current and future construction projects may be credit eligible since both the “begun construction” and placed in-service date is critical in determining whether the enhanced credit opportunity applies. It is necessary to carefully review the type of credit being claimed and the requirements specific to that credit.

Since the passage of the Act, the IRS has been busy requesting comments and issuing guidance. We now have prevailing wage and apprenticeship (PW&A) guidance establishing that projects that began construction before January 29, 2023 automatically meet the PW&A requirements and are eligible for the five times multiplier to the base credit. Projects beginning on or after that date must meet the PW&A requirements within the Act. Unfortunately, the “begun construction” requirement is nuanced and one must truly understand the rules to ensure the organization is truly meeting both the prevailing wage and apprenticeship provisions of the Act. “Begun construction” may be met by either meeting the physical work test, where work on the project has been started with continuous physical work occurring or the five percent safe harbor. Organizations relying upon either the physical work test or five percent safe harbor provision should fully document this position since the additional five times credit multiplier opportunity may be significant. It is important to note that even with the five percent safe harbor the continuous work requirement still applies.

To meet the current PW&A requirements, it is important for an organization to include appropriate language in contracts, meet with contractors and document compliance with the rules to ensure these provisions are met. If your organization is currently requesting proposals (RFPs) on projects, inclusion of specific language surrounding PW&A, domestic content and other critical provisions of the Act is a necessary step to ensure provisions within the Act are built into your construction project. Failure to do so may result in a reduction of your tax credit.

Financing any capital project is a significant decision for tax-exempt organizations. The attractiveness of the energy credits is the fact that the Act allows certain tax-exempt entities, state and local governments and tribal governments to treat various tax credit amounts as a direct payment of tax with any payments in excess of an organization’s tax liability as refundable. This monetization of credit opportunities is only allowed for certain types of tax credits. The Act also provides for transferability whereby allowing an organization to sell the credit to other parties. If an organization is eligible for direct pay, they are not eligible to sell the energy credits. Conversely, taxpayers not eligible for direct pay can sell the credits. The credit amount may also be reduced if tax-exempt financing is used to fund the project. Through careful planning, opportunities may exist for organizations to earmark the use of tax-exempt funding proceeds and minimize the credit reduction.

The tax credit rules are extremely complex and the details can be overwhelming. There are several nuanced definitions and technical requirements in each area of the rules. In addition, multiple credits may be available for certain technologies, but there are rules to prevent double dipping. A careful analysis must be conducted to ensure the right mix of credits is claimed in order to maximize the tax benefits.

Now is when tax-exempt entities should be reviewing your organization’s deferred maintenance and construction project timeline. Both current and future construction projects may see significant tax credit opportunities within the Inflation Reduction Act.

Please reach out to your Baker Tilly advisor if you have questions regarding the Inflation Reduction Act or other tax matters. We continue to monitor legislative developments and will issue additional alerts as new guidance becomes available.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.