Elective (“Direct”) Pay

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 22.5% in 2033, and 15% in 2034. 

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

*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:

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). Other organizations in sections 501 through 530 are also eligible.

This covers:

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

Also, see the IRS “Pre-Filing Registration Tool” guide (p. 7 of pdf) for a detailed chart of eligibility by organization type.

How to apply

  1. Start your project (organize your financing, choose an installer, sign a contract, etc.)
  2. Get a federal EIN if your organization doesn’t have one already. You will need an EIN to apply for the registration ID described below.
  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. If your organization’s tax year does not follow the calendar year, pay special attention to which tax year your system will be completed.
  4. Complete your project and get it interconnected.
  5. After your system has been placed in service, get a registration ID from the IRS using their online pre-registration system.** (IRS Guide on submitting). The IRS recommends doing this as early as possible and preferably at least 120 days before entity plans to file its tax return for that year. IMPORTANT: Each project will have its own registration ID and a taxpayer can only apply for registration ID(s) once per tax year. If you are planning on claiming Elective Pay for more than one project, be sure to wait until all projects for that tax year are complete and placed in service.
  6. Receive a Registration ID from the IRS
  7. 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. Where you claim the credit in your specific filing form will vary. See page 10 of the IRS pdf guide for more information. Forms needed for tax filing will vary but generally include: 
    1. The tax form your organization already files annually or, for entities that don’t file a tax return annually, the IRS instructs using Tax Form 990-T.
    2. The tax credit form(s)/worksheet(s) of the credit(s) for which you’re applying.
  8. The IRS will disburse a refund to your organization for the amount you’ve claimed after the due date for your tax filing type.

* Eligibility for the tax credit happens after a system has been “placed in service,” as stated in the tax code. What that means is a gray area. According to the Solar Energy Industries Association (SEIA) a conservative interpretation would be when your system is ready to be connected to the grid. (NOTE: The SEIA page is from 2019 so the tax credit percentages shown there may be out of date.)

** 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 tax-exempt grant or forgivable loan 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 tax-exempt grant or forgivable loan amount plus the tax credit amount may not exceed the total project costs used to calculate the credit ($50,000 in this example).