Tax-exempt organizations and state, local, and Tribal governments may now be allowed to receive a payment in lieu of certain tax credits, under the Inflation Reduction Act of 2022, which was signed into law by President Joe Biden on August 16, 2022.
This new provision, which goes into effect for taxable years beginning after 2022, also applies to Alaska Native Corporations, cooperatives that provide electricity to rural areas, and the Tennessee Valley Authority.
Additional guidance will be issued on how entities will apply for and receive the payments in lieu of credits.
Clean Energy Tax Credits
One of the applicable credits is the Internal Revenue Code (IRC) Section 45W qualified commercial clean vehicles tax credit, which provides a credit of up to $7,500 for a vehicle weighing less than 14,000 pounds and up to $40,000 for a vehicle 14,000 pounds or larger.
Qualified vehicles would generally be electric vehicles and fuel-cell vehicles. The requirement that a qualified commercial clean vehicle be depreciable property doesn’t apply to vehicles owned by tax-exempt organizations.
Another applicable credit is the Section 48 investment tax credit, which allows a credit for certain investments in renewable energy property such as solar, fuel cells, wind energy, waste energy recovery, and microturbines. The amount of the credit is a percentage of the organization’s basis in the property.
Learn more about applicable credits in An Overview of Clean Energy Tax Legislation in the Inflation Reduction Act.
Other Applicable Provisions of the Law
The Inflation Reduction Act contains several other provisions of interest to tax-exempt organizations and government entities. These include the corporate alternative minimum tax and Section 179D deduction.
Corporate Alternative Minimum Tax
The corporate alternative minimum tax was revived for taxable years beginning after 2022.
The tax will be 15% for corporations with average annual adjusted financial statement income (AFSI) of more than $1 billion for a three-tax-year period. This minimum tax will apply to tax-exempt organizations, but only if AFSI from unrelated business income or taxable debt-financed income is over the $1 billion threshold.
Section 179D Deduction
The Inflation Reduction Act will now allow the Section 179D deduction to be allocated to designers of commercial property owned by tax-exempt organizations, Indian Tribal governments, and Alaska Native Corporations. The design firm receiving the allocation will be treated as the taxpayer for purposes of the Section 179D deduction.
Buildings on federal, state, or local government property were already allowed to allocate the deduction to the designer.
Under the new law, designers could receive a deduction as much as $5 per square foot when making efficiency improvements above certain energy thresholds to commercial buildings. This tax deduction incentivizes designers to create energy-efficient buildings via a potential tax deduction if the building meets certain energy cost savings thresholds.
In effect, the ability to allocate this deduction to the designer provides incentive to install more energy-efficient features, which ultimately provides savings to tax-exempt organizations via lower energy bills.
The new law requires the development of regulations or other guidance on how the allocation of the deduction will work.
Direct Funding Opportunities
The new law implements several environmental policy initiatives through direct funding rather than through tax deductions or credits. Not-for-profit organizations and state, local, and Tribal governments are eligible to apply for these programs.
Apply for Available Funding
- $1.5 billion for grants for tree planting and related activities
- $2.6 billion for the conservation, restoration, and protection of coastal and marine habitats
- $297 million for alternative fuel and low-emission aviation technology
- $200 million for training and education to contractors involved in installation of home energy efficiency and electrification improvements
- $1 billion to replace non-energy efficient vehicles with zero-emission vehicles, develop zero-emission infrastructure, and support the deployment of zero-emission vehicles
- Nearly $27 billion to a greenhouse gas reduction fund to allow low-income and disadvantaged communities to benefit from zero-emission technologies
- $3 billion for environmental and climate justice block grants
- Nearly $1.9 billion for neighborhood access and equity grants
Direct funding is available to states, local governments, and Tribes for various energy rebates and assistance to develop updated building energy codes. Port authorities or state, local, or Tribal governments that have jurisdiction over a port or a port authority have direct funding available to reduce air pollution at ports.
We’re Here to Help
To learn more about how provisions in the Inflation Reduction Act of 2022 could impact your organization, contact your Moss Adams professional. You can also see the most updated tax planning strategies related to these changes on our Tax Planning Resources page.