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Dane County Office of Energy & Climate Change

Inflation Reduction Act Resources for Nonprofits, Local Governments, and Schools

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Elective Pay

Local governments, school districts, tribal governments and some tax-exempt entities that do not pay taxes can receive payments directly from the US Treasury as a one-time transaction with no ongoing report requirements for some of their clean energy projects in lieu of receiving tax credits.

The IRS has identified a five-step process to claim Elective Pay credits:

  1. Identify and pursue the qualifying project or activity. 
  2. Determine your tax year. An entity’s tax year is their annual accounting period (e.g., a fiscal year of July 1 to June 30 or January 1 to December 31). See IRS FAQ #23 for more information. Note that you need to pre-register project in the tax year that the project is completed, which might mean that steps 3 and 4 are concurrent in some cases.
  3. Complete your project and place it into service. Keep all the documentation necessary to properly substantiate any underlying tax credit, including if bonus amounts increased the credit. 
  4. Complete pre-filing registration with the IRS. This will include the credits you intend to earn, among other information. Upon completing the pre-application, the IRS will provide you with a registration number for each applicable credit property. You will need to provide that registration number on your tax return as part of making the elective pay election. 
  5. File the required annual tax return by the due date (or extended due date) and make a valid elective payment election. This includes properly completed and attached source credit forms, Form 3800 (including registration numbers) and required return attachments. For general filing tips for exempt organization returns, see tax information, tools, and resources for charities and other tax-exempt organizations.
  6. Receive payment after the return is processed.

See the IRS FAQ for more details on this process as well as the IRS Elective Pay webpage for information sheets for specific kinds of tax-exempt entities. Also see this factsheet for an overview of the Elective Pay process, as well as the same verison in Spanish. We also have a summary handout for tax-exempt organizations.

Elective Pay does not apply to all of the tax credits under the IRA but it does apply to renewable energy credits and the clean fuel vehicles.  A full list of the activities that qualify for Elective Pay is at the IRS FAQ #13.  Notably, Elective Pay is not authorized for the Energy Efficient Commercial Buildings Deduction. In that instance tax-exempt entities are permitted to allocate the tax deduction to the project designer. 

  

Elective Pay Credits & Deductions for Nonprofits

Building Efficiency

The IRA expanded and enhanced an existing energy efficiency tax deduction, Energy Efficient Commercial Buildings Deduction (179D)

The energy efficiency deduction is a deduction, not a tax credit so it is not eligible for Elective Pay. Instead of claiming the deduction directly, tax-exempt entities can assign the deduction to the project designer.  

Deduction Specifics

Under the IRA, the tax deductions of $0.63 to $1.88 per square foot is modified to $0.50 - $1.00 on a sliding scale based on savings achieved, with incentives increasing to $2.50 to $5.00 per square foot when the project meets prevailing wage and apprenticeship requirements

Increasing energy efficiency 25% over the baseline will garner a $2.50/square foot tax deduction provided that prevailing wage and apprenticeship requirements are met. A 50% reduction would garner the $5.00/square foot tax deduction.  The deduction is based on modeled energy savings; there are specific requirements about who does the modeling and what kind of model is used. 

  • The baseline for new construction is the ASHRAE 90.1 standard (starting with ASHRAE 90.1-2007 for projects placed in service in 2023-2026, and 90.1-2019 for projects placed in service starting in 2027).
  • The baseline for existing building retrofits can be the energy use intensity (EUI) of the current facility. 

The tax deduction applies to both new construction and retrofits.  And the tax deduction is permanent; there is no expiration provision in the legislation. This is also a tax deduction, not a tax credit. We encourage entities to discuss the potential deduction as part of project planning with both project contractors and tax advisors. 

More Information

Solar and Wind

Less than 1 MW(ac)
The IRA will provide 30% funding for solar and wind installations of less than 1 MW(ac) on commercial facilities, with no maximum allowance. The 30% credit also applies to battery storage and interconnection charges. 

  • The incentive is a 30% tax credit for a for-profit business that files tax returns.
  • The incentive is a 30% Direct Pay from the US Treasury for nonprofits and public entities.
  • Projects can earn additional credit for:
  • The total credit is reduced by up to 15% for projects funded via tax-exempt bonds (which applies mostly to local governments and school districts).  
    • For example: solar project funded wholly via tax-exempt bonds that meets domestic content criteria would qualify for a total credit of 34% [which is 30% + 10% - (15% x 40%) = 34%] 
  • In general, the eligible project amount is not affected by tax-exempt grants or incentives from entities like Focus on Energy; consult your tax professional and see the US Department of Energy guidance for more information
  • Credits are in effect 2023 - 2032

Refer to Department of Energy summary for more information on the Investment Tax Credit for solar energy projects.  

More about transitioning your organization to renewable energy is here

1 MW or Larger 

Systems that are 1MW (ac) or larger are eligible for a 6% Elective Pay Credit; that credit increases to 30% if the project meets Prevailing Wage and Apprenticeship requirements. Refer to the US Department of Labor FAQs for more  information on prevailing wage and apprenticeship.

Additionally, beginning in 2024 there is a penalty for Elective Pay Credit projects over 1MW(ac) that do not meet the Domestic Content requirements. In 2024 the penalty is 10%, which increases to 15% in 2025. Beginning in 2026 projects over 1MW(ac) that do not meet Domestic Content requirements are not eligible for Elective Pay. 

More about transitioning your organization to renewable energy is here

Geothermal & Other Renewables

Less than 1 MW(ac)

With the Investment Tax Credit entities can receive a 30% credit for geothermal installations and other renewable energy installations, including biogas.

  • The incentive is a 30% tax credit for a for-profit business that files tax returns
  • The credit is 30% for tax-exempt entities that utilize Elective Pay.
  • Projects can earn additional credit if:
  • The total credit is reduced by up to 15% for projects funded via tax-exempt bonds, generally applies to local governments and school districts.
    • For example: solar project funded wholly via tax-exempt bonds that meets domestic content criteria would calculate their credits as:

                             (30% + 10%) - (15% x 40%) = 34%

  • In general, the eligible project amount is not affected by tax-exempt grants or incentives from entities like Focus on Energy; consult your tax professional and see the US Department of Energy guidance for more information

Over 1 MW(ac)

If a renewable energy installation is over 1MW(ac) the Elective Pay credit is 6%; if prevailing wage and apprenticeship requirements are met the Elective Pay increases to 30%. 

In situations where a facility is adding both solar and geothermal, the combined system must be under 1 MW(ac) or meet the prevailing wage requirements to receive the 30% credit.

Refer to IRS guidance for more information for more details. 

Fleet Vehicles

Under the IRA tax-exempt entities can receive Elective Pay credits to offset the costs of purchasing electic vehicles (EVs) and, in some cases, EV charging infrastructure.

The IRA includes separate provisions for clean fuel tax credits for consumers and businesses. Although the consumer credits include specifications around vehicle components, businesses are not subject to this provision. 

For qualified commercial clean vehicles, the credit equals the lesser of:

  • 15% of the entity’s tax basis in the vehicle (30% if the vehicle is not powered by gas or diesel); or
  • The incremental cost of the vehicle. Incremental cost is the excess of the purchase price of a qualified commercial clean vehicle over the price of a comprable vehicle

The maximum credit is $7,500 for qualified vehicles with gross vehicle weight ratings (GVWRs) of under 14,000 pounds and $40,000 for all other vehicles. The credit applies to road vehicles as well as mobile machinery, as defined in § 4053(8) of the Code. There is no limit on the number of credits your business can claim and elective pay is available for tax-exempt entities.

Vehicles That Qualify:

  • Must be made by a qualified manufacturer;
  • Be for use in business, not resale, and for use primarily in the United States; and
  • Have not been allowed a credit under section 30D and 45W.
  • The vehicle must also be either:
    • A plug-in electric vehicle that draws significant propulsion from an electric motor with a battery capacity of at least 7 kilowatt hours if the gross vehicle weight rating (GVWR) is under 14,000 pounds or 15 kilowatt hours if the GVWR is 14,000 pounds or more; or
    • A fuel cell motor vehicle that satisfies the requirements of IRC 30B(b)(3)(A) and (B).

See also FAQs for the Commercial Clean Vehicle Credit

Vehicle Charging

Some tax-exempt entities that install EV chargers and station equipment at their property can qualify for a tax credit of up to 6% of the cost of charging equipment (or 30% if prevailing wage and apprenticeship requirements are met), up to a maximum credit of $100,000 per unit. Projects completed before December 31, 2022 are subject to the prior $30,000 cap.

Qualifying for Vehicle Charging Credits

To qualify, the equipment must be placed in a low-income community or a non-urban area.

  • Rural: The US Census defines urban areas - everything else is considered rural. Urban areas have a population of 5,000 or more so the tax credit is available in all the areas that are not urban. Use this map from the Greater Madison MPO to see if your location qualifies as urban or not.  (The map defaults to Dane County but you can use the drop down arrow to select "All" to search for addresses outside of Dane County.)  All areas encircled by the red borders are urban. 
  • Low-Income:  Low-income communities include population census tracts where the poverty rate is at least 20% or is a metropolitan or non-meetropolitan area census tract where the median family income is less than 80% of the state medium family income level.  This map shows low income census tracts across the US.  Use the search icon to type in an address and it will tell you the poverty rate and median income of that tract.  (Be patient - it's a big map so it will take a few minutes to fully load.)

Review the IRS guidelines for all of the specifics about this credit.  

  

        graphic of paper, pen, and money bagsEnvironmental Justice Grants   

The federal government offers a variety of competitive grants specific to environmental justice issues. The best way to stay informed about these opportunities is to subscribe to federal newsletters like the White House Environmental Justice News and Updates. In addition, below are several sources to search for federal grant opportunities:

Climate Action Funding Guide - a guide to offer resources for locating federal funding opportunities.

Federal Funding Opportunities for Local Decarbonization (FFOLD) - this database includes decarbonization funding opportunities through the Federal Registratar, Grants.gov, and federal legislation. It is updated quarterly.

Grants.gov for all federal grant opportunities.

The Electrification Coalition has created an EV Funding Finder, a new tool that helps identify federal funding for electric vehicles from both the Infrastructure and Inflation Reduction Acts.

Public Service Commission OEI grant program. Wisconsin's state energy office periodically offers competitive grants related to energy efficiency, renewable energy, energy storage, energy planning, and more. Subscribe to their newsletter for updates.

  

McFarland building

Success Story!

Learn about the Village of McFarland's new public safety building and see how IRA tax credits benefitted this project.