The world of clean energy is evolving, and with it, the opportunities for nonprofit organizations. The U.S. Treasury Department's recent guidance on direct pay and clean energy tax credit transferability could be a game-changer for nonprofits. But what does it mean for your organization? Let's explore:
The U.S. Treasury Department has recently issued new guidance on direct pay and clean energy tax credit transferability under the Inflation Reduction Act. This historic legislation, which allocates nearly $400 billion towards clean energy and climate change mitigation, is currently being implemented by the federal government. The process has been complex, causing project developers and manufacturers to hold off on investments until further clarification. For nonprofits, this presents a unique opportunity to leverage these changes for their benefit.
THE NEW GUIDANCE AND ITS IMPLICATIONS
The Treasury has already provided guidance on several aspects, including electric vehicle tax credits, energy communities, and domestic content. The Internal Revenue Service (IRS) has also issued proposed regulations describing rules for entities that earn certain clean energy credits and choose to make an elective payment election. These rules also apply to eligible taxpayers that elect to transfer certain credits to unrelated parties.
OPPORTUNITIES FOR NONPROFITS
Starting from tax years beginning after December 31, 2022, applicable entities can choose to make an elective payment election. This will treat certain credits as a payment against their federal income tax liabilities rather than as a nonrefundable credit. Any excess payment will be refundable after offsetting any tax liability of the entity.
Applicable entities generally include tax-exempt organizations, state and local governments, Indian tribal governments, Alaska Native Corporations, the Tennessee Valley Authority, and rural electric cooperatives. Other taxpayers may elect to be treated as an applicable entity for a limited number of credits.
For nonprofits, this means that they can now leverage these tax credits to fund their clean energy initiatives. By making an elective payment election, nonprofits can offset their federal income tax liabilities and even receive a refund for any excess payment.
TRANSFERABILITY OF CREDITS
Additionally, certain eligible taxpayers can make an election to transfer all or a portion of an eligible credit to unrelated taxpayers for cash payments, starting from tax years beginning after December 31, 2022. The unrelated taxpayers can then claim the transferred credits on their tax return. The cash payments are not included in the gross income of the eligible taxpayer and are not deductible by the unrelated taxpayers.
This provision opens up new avenues for nonprofits to generate funds. By transferring their eligible credits to unrelated taxpayers, nonprofits can receive cash payments that can be used to further their mission.
NAVIGATING THE NEW REGULATIONS
Temporary regulations have also been issued, providing rules related to a mandatory IRS pre-filing registration process, which will be through an electronic portal. This process must be completed, and a registration number received, prior to making an elective payment election or an election to transfer eligible credits.
The landscape of clean energy tax credits and transferability is evolving, and it's crucial for nonprofits to stay informed about these changes.
If you're interested in learning more about how these changes could impact your organization, we invite you to connect with us at Innovate Energy Group (IEG). Our team of experts is ready to help you navigate these changes and maximize the benefits of your clean energy initiatives.
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