On Aug. 16, after almost a year of negotiations, President Biden signed the Inflation Reduction Act (IRA) of 2022 into law. The law, which originated in 2021 as the much larger Build Back Better Act, includes hundreds of billions of dollars to fight climate change, in the form of tax credits and other incentives intended primarily to promote a variety of “green” energy sources and technologies.
The following offers an overview of select provisions in the IRA that could benefit or otherwise affect nonprofit organizations. The specific impacts and benefits for an organization will depend on its mission and activities.
Direct-pay option for certain tax credits
The IRA includes numerous provisions that provide incentives, in the form of tax credits, for individuals and businesses to acquire more climate-friendly equipment, such as electric vehicles. Most of these provisions do not typically benefit tax-exempt organizations.
However, to encourage tax-exempt entities to invest in certain clean energy credits, the IRA allows tax-exempt entities (as well as certain governmental and other entities) an option to make a direct-pay election. Under the election, credits generated by certain renewable energy projects will be treated as a direct payment against tax. This means a tax-exempt entity may be eligible for a tax refund even if they do not have any unrelated business taxable income (UBTI).
Climate-friendly facility and equipment upgrades
The “energy-efficient commercial buildings” deduction found in § 179D of the Internal Revenue Code (IRC) was expanded to benefit nonprofits.
The deduction is based on the cost of energy-efficient commercial building property placed into service during the year, subject to certain limitations. Prior to the IRA, the deduction was only available to building owners and tenants bearing the cost of the property placed in service. Or if installed on federal, state, or local government property, the deduction could be allocated to the person who was “primarily responsible for the design” of the property. Under Section 13303 of the IRA, specified tax-exempt entities may now allocate the deduction to the “person primarily responsible for the design” of property that is installed on or in the property owned by the tax-exempt entity.
Environmental programs and incentives
Nonprofit organizations that promote solar energy, clean air and water, and other environmental concerns will find much in the IRA to celebrate, such as the following :
- Section 13101 of the IRA modifies and extends the tax credit for electricity produced from “qualified energy resources,” defined by IRC § 45 to include wind, solar, geothermal, hydropower, biomass, and other sources.
- Section 13601 reinstates the Hazardous Substance Superfund excise tax on crude oil and various petroleum products found in IRC § 4611. The purpose of this tax is to provide funding for cleanup efforts at Superfund sites, but Congress allowed it to expire more than two decades ago. The new law removes all references to an expiration date for the tax. The reinstated excise tax will take effect at the beginning of 2023.
Environmental justice projects
The IRA contains multiple provisions that address environmental problems faced by marginalized communities. Nonprofit organizations that work in the environmental justice field may find new programs that align with their missions. Examples include the following:
- Section 50231 provides $550 million to remain available over the next 10 years to the Bureau of Land Management “for grants, contracts, or financial assistance agreements for disadvantaged communities” to improve access to clean water in people’s homes in areas affected by drought.
- Section 60103 amends the Clean Air Act to establish a $7 billion Greenhouse Gas Reduction Fund “to enable low-income and disadvantaged communities to deploy or benefit from zero-emission technologies.”
Many of the provisions in the IRA have a post-2022 effective date so please consult with your Rehmann advisor about the timing of any projects you intend to pursue.