IRA of 2022 allows tax-exempt organizations claim energy tax credits

Tax professionals who are still sorting out the impact of the numerous energy tax credits included in the?Inflation Reduction Act of 2022 ?(IRA of 2022) should note that, in addition to providing benefits to individuals and businesses, the legislation also allows tax-exempt entities to claim some of the credits. Prior to the enactment of the IRA of 2022, energy-related tax credits could only be used by exempt organizations to offset taxable income, leaving them unable to claim the credits unless they partnered with a for-profit entity.

To promote energy investment nationwide, the IRA of 2022 allows tax-exempt organizations to receive direct payments from the federal government for credits of up to 50% of the organization’s qualified costs. According to a U.S. Department of Treasury?fact sheet , state, local and tribal governments as well as other tax-exempt entities can claim the following credits as direct payments:

• Alternative fuel refueling property credit (§30C)
• Production tax credit (§45, §45Y)
• Credit for carbon oxide sequestration (§45Q)
• Zero-emission nuclear power production credit (§45U)
• Credit for production of clean hydrogen (§45V)
• Credit for qualified commercial clean vehicles (§45W, tax-exempt entities only)
• Advanced manufacturing production credit (§45X)
• Clean fuel production credit (§45Z)
• Investment tax credit (§48, §48E)
• Advanced energy project credit (§48C)

For an organization to receive the maximum available credit, projects must adhere to the prevailing wage and apprenticeship requirements laid out in?IRS Notice 2022-61 , use U.S.-sourced materials and be located in certain communities. Notice 2022-61 also provides guidance on determining when construction or installation begins on certain properties. The IRS and Treasury Department plan to issue proposed regulations and other guidance regarding the prevailing wage and apprenticeship requirements in Notice 2022-61.

Adhering to the prevailing wage and apprenticeship requirement allows an organization to claim a credit of up to 30% of qualified costs, but failing to do so reduces the amount to 6% of qualified costs. Sourcing materials from the U.S. can increase the credit by 10% of qualified costs and being located in certain “energy communities” will add an additional 10%. Energy communities include brownfield sites, tracts adjoining certain closed coal mines or power plants, and some communities that have seen significant declines in employment or tax revenue related to the processing, transport or storage of coal, oil or natural gas.

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