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In a significant development for environmental progress, the IRS has announced new guidelines under the Inflation Reduction Act (IRA), enabling not-for-profits and other tax-exempt entities to access valuable clean energy tax credits. The move introduces two key mechanisms: elective pay (also referred to as direct pay) and transferability, which are set to change the landscape of how clean energy projects are funded and implemented.
In the past, many not-for-profit organizations faced hurdles in fully benefiting from clean energy tax credits. The new IRA provisions aim to accelerate the development of clean energy projects, making them more affordable and widely accessible, thus benefiting a broader range of communities.
Eligibility for these tax credits has been significantly expanded. Tax-exempt and governmental entities can now receive elective payments for 12 clean energy tax credits. These include major Investment and Production Tax credits as well as credits for electric vehicles and charging stations.
In addition, businesses can select elective pay for three specific credits, and they have the option to transfer part or all of 11 clean energy credits to third parties. This offers a flexible approach for entities with insufficient tax liability to fully utilize the credits.
IRS Launches New Pre-filing Registration Tool
A key component of accessing these benefits is the IRS's newly unveiled IRA/CHIPS Pre-filing Registration Tool. This tool is essential for organizations looking to register and monetize their clean energy credits. To use it, organizations must complete a pre-filing registration with the IRS to obtain a unique registration number, which is then included in their annual tax return as part of making a valid election. The IRS recommends completing this registration at least 120 days before filing the tax return on which the election will be made.
One notable aspect of the new system is that if the elective payment amount, combined with other tax payments and refundable credits, exceeds the taxpayer's income tax liability, it will be treated as an overpayment. Overpayments can be refunded or credited to the estimated tax for the next tax year.
The IRS plans to enhance the functionality of the registration tool, including features for additional authorized users and an expanded entity type menu, making it more accessible and user friendly.
A Gamechanger for the Not-for-Profit Industry
The introduction of the IRA/CHIPS Pre-filing Registration Tool, coupled with the provisions of the IRA, marks a significant step forward for not-for-profits in their pursuit of clean energy projects. They create a simpler pathway for not-for-profits and similar entities to install clean energy systems, receive tax incentives and own these systems at a lower cost.
This is particularly transformative for not-for-profits, allowing them to access the same financial incentives as for-profit companies. The savings from clean energy upgrades can be used to further these organizations' missions and expand their services, especially in disadvantaged communities.
For More Information
Please be aware that specific rules and exceptions apply to each of the 12 available tax credits. For detailed information, refer to the IRS's FAQ. In addition, the White House has established a website showcasing how various eligible entities can use these tax credits for direct payment.
Should your non-profit organization require guidance in leveraging these clean energy credits, don't hesitate to connect with one of our not-for-profit tax leaders for assistance.
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