The Inflation Reduction Act of 2022 (IRA or Act) 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 only been available to for-profit entities, the Act 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 colleges and universities, 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.
Institutions with a comprehensive plan will be better positioned to maximize these energy tax credits. From a high-level perspective, the following questions can assist in determining whether the IRA may benefit your tax-exempt organization:
Now is when institutions should be looking at deferred maintenance and other capital projects to determine whether the projects contain qualifying properties that may be eligible for the credit or could possibly be adjusted or modified to maximize the benefit. We have seen significant opportunities with solar projects, whether they are rooftop solar panels or larger ground 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 Jan. 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 fully understand the rules to ensure the organization is truly meeting both the PW&A 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, an institution or organization must 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 issuing requests for 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.
The U.S. Department of Treasury has also issued guidance related to electric vehicles and the environmental justice bonus credit allocation related to solar and wind projects. As with the PW&A requirements, the specifics of the guidance is complicated and institutions must carefully review potential energy projects to ensure alignment with the provisions.
Financing any capital project is a significant decision for higher education institutions. The attractiveness of the energy credits is the fact that the Act allows certain tax-exempt entities 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 ear-mark 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 to maximize the tax benefits.
It is time for your institution to review its deferred maintenance and construction project timeline. Both current and future construction projects may see significant tax credit opportunities within the Inflation Reduction Act.
Baker Tilly can help your institution prepare for and understand the many benefits of the IRA to advance your campus’ mission. To discuss the IRA or other tax matters, contact our team.