Rules for ‘Direct Pay’ Under Biden May Alter the Future of Renewable Energy


Under the Biden administration’s new tax rules, nonprofits (such as schools and local governments) could get the green light and some greenbacks to build and operate low-carbon energy projects, but the fine print may have them frowning. The administration claims this could set the stage for billions in rebates to these tax-exempt organizations. Not everyone’s buying it, though. Critics argue that the Treasury Department kept restrictions that could limit the accessibility of these incentives, meaning nonprofits might need to beef up their tax know-how to navigate the new landscape.

New Tax Rules for Nonprofits to Fund Low-Carbon Energy Projects

The Biden administration ratified tax regulations on Tuesday, allowing nonprofits like schools and local governments to receive federal funding for the construction and operation of low-carbon energy projects. However, some restrictions may limit eligibility, possibly affecting some renewable and electric vehicle projects.

Nonprofits, traditionally unable to leverage tax code provisions promoting decarbonization, can now benefit from the 2022 Inflation Reduction Act. It introduces a provision called “direct pay,” enabling them to finance low-carbon projects like solar and wind farms and receive up to 30% of the project’s value. According to the final rules, this program could send billions of dollars in rebates to tax-exempt organizations.

Energy Secretary Jennifer Granholm praised the move, stating it allowed nonprofits to extend their impacts by installing clean energy technologies and reinvesting savings into crucial community services. Treasury Secretary Janet Yellen affirmed that direct pay and another new program called “transferability”, are bringing governments and nonprofits to the table, enabling companies to realize greater value from incentives for deploying clean energy.

The Inflation Reduction Act tax credits are credited with boosting the U.S. economy, benefiting some of the country’s most impoverished areas. An analysis from the Treasury Department reveals that 86% of clean energy investments post the Act’s passage are in counties with below-average college graduation rates and 78% are in counties with below-average median household incomes.

However, tax experts argue that the Treasury Department rules limit direct pay eligibility for partnerships, common for large investment projects. Nonprofits might need to invest resources to comprehend the new regulations. This comes in the light of the Treasury Department rejecting pleas for allowing chaining — 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 final direct pay rules for 12 total Inflation Reduction Act credits in June 2023. Since then, over 1,000 projects have registered for direct pay and transferability. However, Republicans have called for its repeal, arguing that it gives away billions to clean energy entrepreneurs and wealthy electric vehicle drivers.

Experts believe the proposal to allow entities to opt out of tax partnership status might only benefit a narrow set of nonprofits. Tax experts are also awaiting information on domestic content rules for direct pay, which require that materials used in projects be domestically produced. If these rules are not met, direct pay rebates could be reduced or no longer available for projects starting construction after 2025.

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