If your nonprofit is exploring solar power or other clean energy improvements, direct pay (also known as elective pay) could be another tool enabling greater returns on your investment. Traditionally, only for-profit entities could leverage tax credits for renewable energy projects. Now, thanks to recent policy shifts, qualified nonprofit organizations can tap into these benefits directly—even without a tax liability.
Here's the best part - most nonprofits, including 501(c)(3) organizations, are now eligible to benefit from the IRS’s direct pay. Under recent legislation, you don’t need a tax liability to receive these incentives—meaning the majority of tax-exempt entities can significantly reduce the cost of installing solar or other clean energy projects.
In this post, we’ll give you an overview of how direct pay works, along with a step-by-step guide to ensure you navigate the process smoothly and maximize your organization’s savings. By taking advantage of direct pay, your nonprofit can reduce out-of-pocket costs for solar installations and other clean energy projects, freeing up resources for the important work you do in your community.
How Direct Pay Works
- No Tax Liability Required
Unlike traditional energy tax credits that reduce taxes owed, direct pay doesn’t require a nonprofit to have any federal tax liability. Instead, the IRS treats the credit as an “overpayment of tax,” issuing a refund check to your organization for qualified energy projects (like solar). - Straightforward for Nonprofits
Nonprofits have historically missed out on benefits reserved for commercial entities. Direct pay levels the playing field by allowing organizations such as churches, educational institutions, and charitable groups to receive funding even though they do not pay income tax. - Key Legislation
The Inflation Reduction Act (IRA) paved the way for elective pay, ensuring that clean energy incentives are more inclusive. This means your organization can invest in a renewable energy project, place it in service, and then apply for direct pay, effectively offsetting a portion of the project’s cost. - Potential for Bigger Impact
Because direct pay lowers your net cost for clean energy, you can reinvest those savings into your core mission. Whether that’s community outreach, educational programs, or healthcare initiatives, every dollar you save on solar is another dollar available to serve those who depend on you.
Streamlined Direct Pay Guide for Nonprofits
For more information - be sure to checkout our partner Collective Sun.
If your nonprofit is ready to take advantage of direct pay for your solar project, following the right steps is crucial. Below is an overview of the process, complete with key deadlines and important IRS references.
Step 1: Place Your Solar Project in Service
Begin by ensuring your solar project is both completed and ready for its intended purpose. This “in-service” date marks the official starting point for claiming direct pay.
Step 2: Determine Your Tax Year and Form Year
Your organization’s tax year can be a calendar year (January 1 – December 31) or a fiscal year with different start and end dates.
- Calendar Year Example:
If your nonprofit’s tax year is January 1 to December 31, 2024, and your solar project was placed in service on June 15, 2024, you’ll claim direct pay in the 2024 tax year using the 2024 form. - Fiscal Year Example:
If your nonprofit operates on a fiscal year that ends on June 30, then your 2024 tax year actually runs from July 1, 2023, to June 30, 2024.
Step 3: Complete Pre-Filing Registration
The IRS requires you to register before filing your tax return. Visit the following resources for detailed instructions:
- Elective pay and transferability | Internal Revenue Service (irs.gov)
- Publication 5884, Inflation Reduction Act (IRA) and CHIPS Act of 2022 (CHIPS) Pre-Filing Registration Tool User Guide
- Publication 5902, Clean Energy Authorization Permission Management User Guide
- Register for elective payment or transfer of credits
- Elective Pay and Transferability Frequently Asked Questions
- Treasury, IRS finalize rules on elective payments of certain clean energy credits under the Inflation Reduction Act
Step 4: File Your 990-T Return
The Form 990-T is generally due 5 months and 15 days after your organization’s tax year ends. Make sure you meet this deadline to avoid penalties or delays.
Step 5: Await Your Tax Refund
Expect a refund around 45 days after the official due date of your return. Filing early won’t necessarily speed up the refund, as the IRS considers it due on the official return deadline.
Interested in learning more or need assistance?
At Andall Energy, we’re dedicated to helping nonprofits achieve their sustainability goals and take advantage of beneficial programs like direct pay. Contact us to discuss how we can support your next clean energy project.
Important Disclaimer
This post is for informational purposes only and does not constitute legal or tax advice. For guidance tailored to your organization’s specific situation, please consult qualified legal counsel and a tax advisor.
