Elective (“Direct”) Pay

IMPORTANT: As of June 2023, the rules for this program have not been finalized by the IRS. Final rules are expected later in 2023. The information provided here is provisional and does not reflect final guidance provided by the IRS.

DISCLAIMER: Solar United Neighbors is not a tax advisor. The information included here should not be taken as tax advice. We recommend you consult with a qualified tax advisor on your particular tax situation.

Federal tax credits for tax-exempt organizations

Nonprofits are now able to benefit from federal tax credits for solar and/or battery installations. This is thanks to the Inflation Reduction Act of 2022. It provides nonprofits with an Elective (“Direct”) Pay option. This allows them to benefit from the tax credit and still own their system.

Previously, nonprofits were unable to do so because these institutions have a tax-exempt status. This meant they had to install their systems through financiers or third parties. These entities were then able to monetize the tax credit. They could then incorporate those savings into the final price.

What’s available for nonprofits via direct pay?

Nonprofits can now take a credit of 30% off the cost of the system. For example, if your solar array cost $50,000, the tax credit value paid to your organization would be $15,000.

This 30% credit is available through 2034. Then, it steps down to 26% in 2033, and 22% in 2034. 

There are also adders that some projects may qualify for which make the tax credit more than the base 30%.

  • 10% for projects located in energy communities
    • Communities that contain brownfields
    • Communities that are economically disadvantaged, particularly if they previously relied on fossil fuel jobs
  • 10% for projects using defined minimums of domestic content for equipment

*Note:  These credits only apply to systems that are smaller than 1 MW. For context, most small business and nonprofit solar installations are less than 100 kW in size. This is one-tenth the 1 MW limit.

Larger projects can also access the 30% base ITC, as well as these adders. But, they must meet certain labor requirements. For projects over 1 MW that do not meet those requirements:

  • the base ITC will be reduced to 6%, and 
  • the energy community and domestic content adders will each be reduced to 2%. 

By application and approval, there are also other adders available for certain projects under 5 MW:

  • 10% for selected projects located in low-income communities or on, tribal lands
  • OR 20% for selected “Qualified Low-Income Residential Building Projects” OR “Qualified Low-Income Economic Benefit Projects”

What organizations are eligible for direct pay?

According to the IRS FAQ, eligible entities include:

  • Tax-exempt organizations
  • States and political subdivisions such as local governments, school districts, and public universities
  • Indian tribal governments & Alaska Native Corporations
  • The Tennessee Valley Authority
  • Rural electric cooperatives
  • U.S. territories and their political subdivisions
  • Agencies and instrumentalities of state, local, tribal, and U.S. territorial governments

Specifically for tax-exempt organizations, those with non-profit status that are tax exempt under IRS code § 501(a) are eligible for elective pay including those in § 501(c) and 501(d). 

This covers:

  • Public charities
  • Private foundations
  • Social welfare organizations
  • Labor organizations
  • Business leagues
  • Religious or apostolic organizations
  • And others

How to apply

  1. Start your project
  2. Get a federal EIN or TIN number if your organization doesn’t have one already.
  3. Decide what tax year applies to your project. Usually, this will be the year the project will be “placed in service”, according to the IRS rules.
  4. Secure a registration ID from the IRS using their online pre-registration system.** (NOTE: This system will be opened for use later in 2023).
  5. Complete your project and get it interconnected.
  6. File a tax return by the IRS due date for the applicable tax return type. Include your registration ID for each tax credit you are claiming for Direct Pay. For most organizations, this due date will be May 15. Electronic filing is required. Required documentation will vary but generally includes: 
    1. The tax form for your organization type. For non-profits, this will likely be Tax Form 990-T and
    2. The tax credit form(s)/worksheet(s) of the credit(s) for which you’re applying.
  7. The IRS will disburse a refund to your organization for the amount you’ve claimed after the due date for your tax filing type.

** Receiving a registration ID should not be considered approval for the tax credit(s) you are requesting. Eligibility for each tax credit type you claim is determined by the rules of that particular tax credit (such as the Section 48E investment tax credit or “ITC” for solar).

Special considerations

Do you have grant funding for part of your project costs?

According to the IRS (question 41), if you have grant funding from most other sources, your project may still be able to claim the tax credit based on the full system cost. 

For example, if your project costs $50,000 and you have a grant to cover $30,000 of that cost from a local foundation, you can still claim a $15,000 tax credit (30% of $50,000). The grant amount and tax credit amount may not exceed the total project costs used to calculate the credit ($50,000 in this example).

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