Before the passage of the Inflation Reduction Act (IRA) over a year ago, tax credits for solar projects were available only to taxable entities. That meant that while tax-exempt and government entities — such as nonprofits, churches, schools and tribes — could go solar via a lease or PPA, they couldn’t directly take advantage of the Investment Tax Credit (ITC).
Thankfully, the IRA changed this limitation with its direct pay provision, also known as “elective pay.” Direct pay allows nonprofits to receive a payment that’s equal to the full value of tax credits when they build qualifying clean energy projects.
Direct pay is undoubtedly a boon for nonprofit entities and should spur much more solar development in this sector. But a couple lesser-known provisions in the regulations could cause snags for nonprofits that aren’t aware of them, as well as for solar developers working with nonprofits.
1. Avoiding the “excessive benefit” pitfall
The “excessive benefit” provision is not part of the IRA bill text itself, but it’s in the regulations from the Dept. of the Treasury, which was authorized in the IRA to provide interpretive guidance and implementation rules. The provision is intended to ensure that tax-exempt entities do not receive funding in excess of their project’s cost by combining direct pay with a grant or donation.
Under this provision, 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.
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