On August 16th, President Biden signed into law the Inflation Reduction Act (the Act) which contains numerous provisions that afford opportunities to tax-exempt organizations. While the bill itself contains over 70 separate tax credits that may benefit our tax-exempt community, it is the enhanced credit opportunities and ability to monetize these credits that will have the most significant impact to tax-exempt organizations. The Act also contains enhancements to the USDA and Department of Energy loan programs providing for direct, low interest loan funding. These tax credit and loan opportunities are available tax-exempt organizations including governments, tribes, nonprofits, colleges & universities, and others, depending on the nature of the project.
Under the section of energy security, the act modifies and extends certain tax credits for non-fossil fuels:
Most of the tax credits are available through 2032, but it is important to note that both current and future construction projects may be credit eligible since the placed in-service date is critical in determining whether the enhanced credit opportunity applies. The amount of credit available is also increased for projects placed in service in low-income communities, where prevailing wages and apprenticeship requirements are met and other specific provisions.
The tax credit rules are extremely complex, and the minutiae 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. Careful analysis must be conducted to ensure the right mix of credits is claimed in order to maximize the tax benefits.
Monetization of credits through refund opportunities or transferability
The Act allows certain tax-exempt entities, state and local governments and tribal governments to treat various tax credit amounts as payments of tax with any payments in excess of an organization’s tax liability being refundable. The monetization of credit opportunities for tax-exempt entities 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.
Rural electric cooperatives
The Act provides USDA assistance for rural electric cooperatives to support the long-term resiliency, reliability and affordability of rural electric systems. The assistance may be in the form of grants and loans to achieve the greatest reduction in carbon dioxide, methane and nitrous oxide emissions associated with rural electric systems through the purchase of renewable energy, renewable energy systems, zero-emission systems and carbon capture and storage systems, to deploy such systems, or to make energy efficiency improvements to electric generation and transmission systems. Rural electric cooperatives should consider whether this and other funding opportunities under the Act would benefit their organization.
Over a number of years, we have seen many organizations postpone construction projects only to see construction costs rise. Now is the time to step back and review your organization’s deferred maintenance and construction project timeline. With all of the opportunities within the Inflation Reduction Act, current and future construction projects may see significant monetary benefits.
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 warranted.
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.