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The Inflation Reduction Act (IRA), passed in August 2022, introduced a new provision called Elective Pay, more commonly known as Direct Pay. Because Direct Pay creates a very exciting new pathway for nonprofit organizations to utilize tax credits previously unavailable to them, we’ve been following it closely since it was introduced.

On March 5, 2024, the final Direct Pay regulations were released. The main news is that there isn’t much news; most of what’s in the final regulations was already in the proposed regulations. However, the final regulations did include three updates that are worth mentioning, two of which are good news for nonprofits.

 

1. Expanded eligibility

The first good news is that instead of just 501(a) entities being eligible for Direct Pay, the final regulations specify that all kinds of nonprofits are eligible — from 501 to 530. A specific one to call out is HOAs. If you’re an HOA and make a 528 election, you are now eligible for Direct Pay. (If you don’t know if you do, ask your CPA if you file a Form 1120-H; if so, you make a 528 election and are eligible.)

 

2. Relief for June 30 year-end tax filers 

More good news: If you’re familiar with our Direct Pay webinars or articles (see the links at the end of this article), you may recall that Direct Pay is available only for organizations whose tax year starts in 2023. If you placed a project in service in the beginning of 2023 and you’re a June 30 year-end filer, your tax year actually started in 2022. 

The final regulations provided some relief for organizations in this situation. If you’re a June 30 year-end filer who does not otherwise ordinarily have a filing obligation, but your tax year started in 2022, you may be able to elect into a 2023 calendar year and be eligible for Direct Pay. 

Government agencies fall into this category. This new rule will be helpful, for example, for schools that placed some electric buses in service in the first half of 2023 and others later that year, after their June 30 year-end. Under the proposed rules, they would not have been eligible for Direct Pay for some of the buses, but now they may be. Keep in mind that eligibility is subject to a number of rules that you should review.

Note: If you have a 6/30 year end and you placed your project in service in the last half of 2023, you don’t need to be concerned about this issue because your tax year started on 7/1/2023 and your project is eligible for Direct Pay in FY24 year ending 6/30/2024.

 

3. Doubling down on excessive benefits

The “excessive benefit” provision in the Direct Pay regulations stipulates that if your nonprofit funds all or a portion of your solar project with grants or charitable donations that are specifically earmarked for solar purposes, your Direct Pay benefits could potentially be reduced or even completely eliminated. For details, see our article on potential Direct Pay pitfalls

Although some had hoped this rule would be amended, Treasury seems to have doubled down on it instead. The final regulations say that if you got a restricted grant (one earmarked for solar) and you later reclassified it as a grant that’s not restricted, then the same excessive benefit rules still apply. In other words, you can’t retroactively change the character of a restricted tax-exempt grant.

The regulations also say that if you get a grant earmarked for a project after the project is placed in service (if the grant is “virtually assured”), that could potentially affect your project’s Direct Pay eligibility. 

All of this means that you’ll want to pay close attention to your grant terms when they are written, characterizing them as the donor sees fit but in compliance with these rules. That’s a conversation you should walk through carefully.

Learn more

This article is based on our April 16, 2024 Direct Pay Update, a brief video on the final regulations. For more on Direct Pay, see our previous webinars and articles; note that some details have changed since the earliest of these.

 

You can learn more about Direct Pay and other IRA provisions in our free courses on HeatSpring. If you have questions about how Direct Pay might affect your nonprofit’s solar plans, don’t hesitate to contact us

 

​​Disclaimer: This information does not constitute legal or tax advice and should not be relied upon for any purpose. Please consult your legal counsel and tax advisor.

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