IRA tax credits: Compliance and timing considerations for tax-exempt organizations

In brief

What happened?

The Inflation Reduction Act of 2022 (IRA) introduced significant tax incentives and notable changes that impact tax-exempt organizations. The IRA (1) created new and expanded tax credits and other incentives to promote clean energy and (2) provides new ways to monetize applicable tax credits through a direct pay option. The IRS recently opened an online pre-filing registration tool where tax-exempt organizations are required to timely register their intention to make a direct pay election. The IRS and Treasury on March 11 published proposed regulations addressing how tax-exempt entities participating in energy projects under a co-ownership structure may qualify to elect direct payment of certain credits. 

See our Insight, Regulations finalized on direct payment of energy and advanced manufacturing tax credits, for more information. 

Why is it relevant?

Tax-exempt organizations can make an annual election to be treated as having made tax payments equal to certain of these applicable credits. The direct payment election is made on a federal income tax return by the extended due date and is reflected on the return as a payment, which reduces the tax due. This new direct pay option makes the credits refundable even if no income tax is otherwise owed and provides opportunities for tax-exempt organizations to monetize previously unavailable credits. 

Action to consider

Tax-exempt organizations are encouraged to (1) understand how the IRA tax incentives will impact their operations, (2) learn about the IRA tax incentives for planning and compliance purposes, and (3) be aware of required compliance obligations and deadlines to monetize applicable tax credits. This includes deadlines for filing required forms with the IRS to claim certain credits and allowing sufficient time to submit required information to the new IRS portal under the pre-file registration process. In addition, projects that began construction in calendar year 2024 may be subject to a credit phase-down if domestic content requirements are not met. This phase-down escalates quickly from a credit reduction of 10% for projects beginning construction in 2024, 15% in 2025, and 100% in 2026 or later. Tax-exempt entities that engage in an energy project with a co-ownership structure should consider whether it would be beneficial to opt out of subchapter K under Section 761(a) for that project under the proposed regulations and elect direct payments.