The Biden administration finalized tax rules Tuesday to give nonprofits such as schools and local governments federal cash to build and operate low-carbon energy projects.
The administration has called the tax plan one of the most significant from the Inflation Reduction Act to drive clean energy, particularly in historically disadvantaged areas. But tax experts say the Treasury Department kept restrictions for the credit that some nonprofits fear will limit their eligibility for incentives, potentially hindering some renewable and electric vehicle projects.
Nonprofits, which do not pay taxes, had been unable to take advantage of many provisions in the tax code that have driven decarbonization of the U.S. economy. The 2022 Inflation Reduction Act aimed to change that, enacting a provision called “direct pay.”
Now, nonprofits that build low-carbon projects like solar and wind farms can get paid up to 30 percent of the value of the project, according to the final rules. The Biden administration says the program could send billions of dollars in rebates to tax-exempt organizations, including tribes, the Tennessee Valley Authority and power cooperatives.
“President [Joe] Biden’s Investing in America agenda has created game changing opportunities to ensure the health and savings benefits of clean energy solutions transform all aspects of American life,” Energy Secretary Jennifer Granholm said in a statement Tuesday. “For the first-time ever nonprofits, from hospitals to food banks, can amplify their impacts thanks to direct payments for installing clean energy technologies using every dollar saved to reinvest in crucial community services.”
Treasury Secretary Janet Yellen said direct pay, along with another new program called “transferability,” are “acting as a force multiplier, bringing governments and nonprofits to the table for the first time and enabling companies to realize greater value from incentives to deploy new clean power and manufacture clean energy components.” Transferability gives for-profit entities the ability to transfer — or, in some cases, sell — credits to other companies.
The administration says Inflation Reduction Act tax credits are boosting the U.S. economy, benefiting some of the most impoverished areas of the country. Eighty-six percent of clean energy investments in the U.S. following the Inflation Reduction Act’s passage are in counties with below-average college graduation rates, and 78 percent are in counties with below-average median household incomes, according to an analysis from the Treasury Department.
Along with the clean energy direct pay rules, the Treasury Department finalized a separate rule for direct pay eligibility for semiconductor production. Treasury also proposed a new regulation that would allow “applicable entities that co-own renewable energy projects to elect out of partnership tax status and therefore access [direct] pay.”
Senate Finance Chair Ron Wyden (D-Ore.) said in a statement the rules “are going to go a long way toward reducing carbon emissions and promoting domestic chip manufacturing.”
“I’m going to continue working to ensure this program reaches its full potential and protect it from Republicans who are trying to undercut the IRA,” he added.
Trevor Higgins, senior vice president of the Energy and Environment department at the Democrat-allied Center for American Progress, said the rules “will help even more communities take advantage of clean energy investments than ever before.”
Yet tax experts say the Treasury Department rules prohibit or severely limit direct pay eligibility for partnerships, which are common for big investment projects. That means that nonprofits, which have little or no tax experience, could need to spend resources to beef up staff to navigate the new rules.
“The IRS and Treasury did not budge very much,” David Burton, a partner with Norton Rose Fulbright, said in an interview. “They did show some flexibility or changes on some technical points, but on really all the big issues [like partnerships], they basically just said, ‘We’re sticking to our original position.’”
The Treasury Department rejected pleas prior to the rule’s release to allow chaining, a term used to describe direct pay for transferred credits. The department is accepting more comments for an ongoing review on chaining.
‘Higher administrative and legal burden’
The IRS proposed the direct pay final rules, which apply to 12 total Inflation Reduction Act credits, in June 2023. In January, the Biden administration said more than 1,000 projects had registered for direct pay and transferability.
Since passage of the law roughly 18 months ago, Republicans on Capitol Hill have clamored for its repeal, which clean energy advocates say is critical to decarbonize the U.S. economy. They say the Inflation Reduction Act gives away billions to clean energy entrepreneurs and wealthy electric vehicle drivers.
The proposal released Tuesday to allow entities to opt out of tax partnership status is likely to help only a narrow set of nonprofits, according to Amy Turner, the director of the Cities Climate Law Initiative at the Sabin Center for Climate Change Law at Columbia Law School.
“It’s a higher administrative and legal burden to elect out of partnership status or navigate a co-ownership arrangement than it is to file for elective payment of tax credits without those extra layers of complexity,” she said in an email. “Still, some elective pay claimants, including local governments, will find the flexibility helpful.”
Casey August, an attorney with Morgan, Lewis & Bockius, said the rules could be challenging for some renewable companies that have not utilized the tax code for energy projects as much some other industries.
The “renewable energy industry is not as accustomed to these types of arrangements as compared to the oil and gas industry,” August said.
Meanwhile, tax experts say they’re waiting on more information from the Biden administration on yet-to-be-released domestic content rules for direct pay, which require that materials used in the projects to be domestically produced.
If nonprofits fail to comply with the rules for projects beginning construction in 2024, a slight reduction in most direct pay rebates will take effect although DOE is providing opportunity for exemptions based on the availability and price of domestic materials. For projects beginning construction after 2025, direct pay is largely no longer available if the requirements are not met.
Marc Nickel, a tax attorney with McGuireWoods who previously worked at Pacific Gas and Electric and at solar company Sunrun, said the final rule made domestic content clarifications for certain “edge cases” but “hasn’t removed the practical difficulty of building with domestic content.”
For-profit organizations are typically not obligated to meet domestic content rules to get underlying Inflation Reduction Act energy credits.
Most Inflation Reduction Act tax credits remain in the proposal stage, although the Treasury Department is pivoting more to final rules, according to some observers.
“I get some sense that the people in the Biden administration are realizing that there is some possibility that they will not have a second term, and therefore want to get things finalized sooner rather than later,” Burton said.
Clarification: In December, the Treasury Department said it would exempt projects that begin before 2025 from domestic content requirements if the entity seeking the credit attests, under penalty of perjury, that it can’t comply due to high costs for domestic content or lack of availability.
