Transforming Communities Through Elective Pay for Nonprofits

Nonprofits can for the first time take advantage of tax credits for clean energy installations that were previously limited to organizations with a tax liability. Churches, schools, hospitals, food banks, community centers, state and local governments, rural electric cooperatives, and tribes that were previously locked out of accessing tax credits—like the investment tax credit (ITC)—can now access them. With “elective pay” (a.k.a. “direct pay”) and thanks to the Inflation Reduction Act of 2022 (IRA) (P.L. 117-169), these entities can claim tax incentives when investing in clean energy projects, such as solar energy, ground-source heat pumps, and battery storage devices. These small-scale renewable energy projects enable lower energy bills and increased resilience and can help create quality contractor and installation jobs, generating local wealth and spurring further demand for these distributed technologies.

However, many nonprofits are unaware of the opportunities created by the IRA. Elective pay, or the monetization of clean energy tax credits for nonprofits and tax-exempt entities, remains relatively unknown two years after the law was enacted. Elective pay is transformational as it allows these entities to claim up to 70% of a clean energy project’s costs as a direct payment from the federal government, greatly improving the project’s financial feasibility. While most organizations can expect to claim between 30 and 50% of a project’s costs, if the law’s bonus credits are stacked, they can reach up to 70% of total costs for projects that are domestically sourced and located in low-income communities. There is no limit to the number of eligible projects a nonprofit can claim “elective pay” for in a single tax year.

Because energy costs are the second-largest budget line cost for nonprofits, after salaries, lowering energy use can help nonprofits shift funds towards advancing their core mission and increasing activities geared to the communities they serve. According to the Environmental Protection Agency (EPA), 30% of energy consumed in commercial buildings, including hospitals, houses of worship, and schools, is wasted. Installing renewable energy projects can help these buildings offset a portion of the energy coming from the grid, helping reduce energy costs. The resulting savings can be used to advance these nonprofits’ missions and expand services to disadvantaged communities.

As part of the IRA, elective pay is available through 2032. In the next eight years, elective pay can help small and large nonprofits join the clean energy economy in a more affordable way. Furthermore, projects under 1 megawatt (MW) of capacity do not need to comply with the IRA’s prevailing wage, apprenticeship, and domestic content requirements to claim the base credit of 30% through elective pay.

Increasing Awareness of the Availability of Elective Pay for Clean Energy Projects

Increasing awareness of elective pay is paramount to helping nonprofits—particularly those in the heartland away from the two coasts—access these tax incentives and increase the adoption of clean energy.

To spread the word, this article’s author recently traveled to Kansas, from EESI’s headquarters in Washington, D.C., to introduce elective pay to local nonprofits and explain how it can help transform their communities. Invited by the Climate and Energy Project and Kansas Interfaith Action—two local nonprofits working on advancing policies to tackle climate change—he offered ideas on how to use energy efficiency, renewable energy, and elective pay to cut energy consumption and reduce carbon emissions.

“The Inflation Reduction Act and elective pay are once-in-a-lifetime opportunities to invest in clean energy,” said Climate and Energy Project Executive Director Dorothy Barnett. “The time is now for nonprofits to claim the tax credits by investing in solar panels and battery storage, which offer multiple benefits to their communities and the environment.”

Discussions with Nonprofits on Clean Energy and Elective Pay

Learning more about how to advance and finance sustainable activities for their members helped bring in folks to the two events in Wichita and Kansas City in early August. Interest in energy efficiency and clean energy was palpable in both rooms. The “why” to do it was clear: caring for the Earth and providing an example of climate action to their communities. But questions about “what to do” and “how to do it” kept coming up from attendees in both meetings. Attendees in both meetings understood the importance of retrofitting their buildings with energy efficiency measures to reduce energy usage and installing solar panels for deeper energy savings.

Taking advantage of elective pay is a complex process. Nonprofits wanting to claim the ITC must fill out two forms with their 990-T tax return forms, IRS Forms 3468 and 3800. This is not an easy or common task for these organizations. Attendees cited a lack of financial expertise and resources as barriers to completing these forms and claiming the base 30% tax credit. Contractors, financial experts, and tax auditors can help fill the expertise gaps. And nonprofits like EESI can highlight completed projects that have taken advantage of elective pay and how organizations went about installing the upgrades and claiming the credits.

Elective pay covers a portion of a clean energy project’s costs but not everything, as it is not a federal grant, but rather a tax credit. The base credit is 30% and can go up to 70%, depending on the project’s location (“energy communities” benefit from a 10% bonus credit), whether the materials and hardware content are sourced domestically (10% bonus credit), and if the project is sited in a Low-Income Community (20% bonus credit). Understanding the bonus tax credits associated with elective pay and whether the project’s location qualifies for them can help the project maximize its credits, allowing it to deliver more significant energy savings and job creation for the community.

Participants in both events asked a common question: “How do nonprofits and churches pay for the rest of the project’s costs not covered by elective pay?” The Inflation Reduction Act created the Greenhouse Gas Reduction Fund (GGRF), a $27 billion investment to mobilize clean energy financing and spur the deployment of these technologies in disadvantaged communities. Nonprofit organizations can use GGRF capital through low-cost, long-term loans to help pay for their clean energy projects.

With the GGRF’s funds recently dispersed to 68 selected grantees, there is now a large infusion of capital available to nonprofits for solar energy and battery storage installations. Nonprofits and tax-exempt organizations can use the IRA elective pay provision to monetize clean energy tax credits and stack them up with GGRF funds to pencil out their projects. Green banks, like Michigan Saves and the Colorado Clean Energy Fund, are offering elective-pay bridge loans to help nonprofits and tax-exempt organizations cover their costs until the elective-pay payments are received from the IRS. Depending on when the clean energy project was installed and placed into service and when the tax return was filed, the entire process can take anywhere between four and 18 months.

Building Resilience Centers Using Elective Pay

One theme that generated excitement across the two meetings is using elective pay to help nonprofits and houses of worship install solar panels and battery storage to increase resilience affordably. Attendees agreed that houses of worship and community centers in Kansas have a resilience role to play in the fight against climate change and natural disasters that are increasingly causing power outages. By installing these distributed energy technologies, they can transform their facilities into resilience centers and help their communities during power outages, extreme heat waves, and other extreme weather events.

Resilience centers or hubs are community-based buildings, like houses of worship or schools, that allow community members to gather in times of emergency due to a natural disaster or power outage. With integrated solar-powered batteries, these centers can provide services like cellphone and medical device charging and keep medicines cool in refrigerators. They can also serve as cooling centers for community members during extreme heat events to help those without air conditioners stay cool. Solar panels provide power to the buildings and charge the batteries during daytime hours. Power stored in batteries can be discharged to meet peak demand and lower energy costs.

With adequate staff—sometimes consisting of volunteers from the community—resilience centers can operate year-round, not just during and after emergencies, and provide educational opportunities. These can include tours of how clean energy devices work, hands-on training workshops on installing solar energy panels and batteries, and an overall understanding of electrical device installation. Such workshop opportunities help to develop the next generation of solar energy and battery storage specialists and installers.

With the utility bill savings resulting from a solar and battery storage installation, the nonprofit operating the resilience center can create an urban farm—if space is available on the property—to offer fresh produce and food resilience to the community. Energy generated from solar panels can heat livestock pens, hoophouses, and chicken coops during the winter months while also powering water pumps for irrigation. The Progressive Community Church in Gary, Indiana, has been running an urban farm for years using the energy and savings from its energy efficiency measures and solar arrays.

With elective pay, nonprofits can transform their buildings by installing solar and electric batteries to reduce energy costs. This will increase resilience, lower carbon emissions, and create strong communities while generating local wealth through clean energy jobs.

Author: Miguel Yañez-Barnuevo