Resources > Elective Pay helps nonprofits go solar

Elective Pay helps nonprofits go solar

• Factsheet

July 2, 2024

DISCLAIMER: Solar United Neighbors is not a tax advisor. The information included on this page should not be taken as tax advice. We recommend you consult with a qualified tax advisor on your particular tax situation.

Federal tax benefits for tax-exempt organizations

Before 2022, tax-exempt organizations couldn’t benefit from federal tax credits for solar and battery storage. Since these nonprofits, churches, and schools don’t pay taxes, there was no way for them to take a tax credit. Their only option was to install solar through financiers or third parties. These parties could benefit from the tax credit and then pass the savings on to nonprofits. But nonprofits couldn’t benefit by owning their own solar systems.

The Inflation Reduction Act (IRA) of 2022 changed all that. Nonprofits can now benefit directly from the tax credit when they install solar or battery storage. And they can own the systems outright. 

Through a provision introduced by the IRA, nonprofits can now receive the equivalent amount of the tax credit in the form of a direct payment from the IRS. This provision is called Elective Pay, or Direct Pay.

Credits available to nonprofits via direct pay

The IRS will now pay a nonprofit the equivalent to 30% of their system cost. For example, if a solar array costs $50,000, the direct payment from the IRS would be $15,000.

This 30% payment is available through 2034. It steps down to 22.5% in 2033, and 15% in 2034.

Some projects may qualify for additional benefits, too.

• 10% for projects located in energy communities (see the Dept. of Energy’s eligibility mapping tool)
  • Communities that contain brownfields
  • Communities that are economically disadvantaged, particularly if they previously relied on fossil fuel jobs
• 10% for projects using defined minimums of domestic content for equipment (additional guidance released in May, 2024 and explained here)
  • IMPORTANT: Projects seeking Elective Pay and completed in 2024 and after must use domestic content. The IRS will be releasing guidance in mid to late 2024. See Q15 of the IRS FAQ.

*Note:  These credits only apply to systems that are smaller than 1 MW. For context, most small business and nonprofit solar installations are less than 100 kW in size. This is one-tenth the 1 MW limit.

Larger projects claiming Elective Pay can also access the 30% base credit, as well as these added benefits. But, they must meet certain labor requirements. For projects over 1 MW that do not meet those requirements:

• the base credit will be reduced to 6%, and 
• the energy community and domestic content adders will each be reduced to 2%. 

By application and approval, there are also other adders available for certain projects under 5 MW:

• 10% for selected projects located in low-income communities or on, tribal lands (map tool)
• OR 20% for selected “Qualified Low-Income Residential Building Projects” (eligible housing) OR “Qualified Low-Income Economic Benefit Projects” (See “Program Resources” section on DOE site for more info)

Domestic Content requirements

The IRS will be releasing guidance on requirements for Elective Pay projects to use domestic content in order to use the entire tax credit value. These requirements will apply for projects completed in 2024 and after. The guidance is expected to be released in mid to late 2024. See Q15 of the IRS FAQ.

Which organizations are eligible for direct pay

According to the IRS FAQ, eligible entities include:

• Tax-exempt organizations*
• States and political subdivisions such as local governments, school districts, and public universities
• Indian tribal governments & Alaska Native Corporations
• The Tennessee Valley Authority
• Rural electric cooperatives
• U.S. territories and their political subdivisions
• Agencies and instrumentalities of state, local, tribal, and U.S. territorial governments

*Tax-exempt organizations with nonprofit status that are tax exempt under IRS code § 501(a), including those in § 501(c) and 501(d), are eligible. Other organizations in sections 501 through 530 are eligible as well. This covers: public charities, private foundations, social welfare organizations, labor organizations, business leagues, religious and apostolic organizations, and homeowners associations.

See the IRS “Pre-Filing Registration Tool” guide (p. 7 of pdf) for a detailed chart of eligibility by organization type.

Important: According to current regulations, organizations registered as nonprofits in Puerto Rico are not eligible for Elective Pay. Nonprofits must be registered as nonprofits under the Federal tax code.

How to apply for the tax credit

1. Start your project (organize your financing, choose an installer, sign a contract, etc.).
2. Get a federal Employer Identification Number (EIN) if your organization doesn’t have one already. You will need an EIN to apply for the registration ID described below. TIP: If your organization may have an EIN but you aren’t sure, find out. Using an incorrect EIN to register for Elective Pay may result in your application being rejected.
3. Decide what tax year applies to your project. Usually, this will be the year the project will be “placed in service,” according to the IRS rules.* If your organization’s tax year does not follow the calendar year, pay special attention to which tax year your system will be completed.
4. Complete your project and get your system interconnected.
5. After your system has been placed in service, get a registration ID from the IRS using their online pre-registration system.** The agency recommends doing this as early as possible and preferably at least 120 days before you plan to file your tax return for that year. Review the IRS Guide on submitting. IMPORTANT: Each project will have its own registration ID and a taxpayer can only apply for registration ID(s) once per tax year. If you are planning to claim Elective Pay for more than one project, be sure to wait until all projects for that tax year are complete and placed in service.
6. Receive your Registration ID from the IRS.
7. File a tax return by the IRS due date for the applicable tax return type. Include your registration ID for each tax credit you are claiming for Direct Pay. For most organizations, this due date will be May 15. Electronic filing is required. Where you claim the credit in your specific filing form will vary. See page 10 of the IRS guide. Forms needed for tax filing will vary but generally include:
   1. The tax form your organization already files annually. For entities that don’t file a tax return annually, the IRS instructs using Tax Form 990-T.
   2. Form 3800 – General Business Credit
   3. The tax credit form(s)/worksheet(s) of the credit(s) for which you’re applying. For the commercial solar tax credit, this is Form 3468.
8. The IRS will disburse a refund to your organization for the amount you’ve claimed after the due date for your tax filing type.

* Your organization is eligible for the tax credit after your system has been “placed in service,” as stated in the tax code. What that means is a gray area. According to the Solar Energy Industries Association (SEIA) a conservative interpretation would be when your system is ready to be connected to the grid. (NOTE: The SEIA page is from 2019, so the tax credit percentages shown there may be out of date.)

** Receiving a registration ID should not be considered approval for the tax credit(s) you’re requesting. Eligibility for each tax credit type claimed is determined by the rules of that particular tax credit (such as the Section 48E investment tax credit or “ITC” for solar).

Special considerations

Do you have grant funding for part of your project costs?

According to the IRS (question 41), if you have grant funding from most other sources, your project may still be able to claim the tax credit based on the full system cost. 

For example, if your project costs $50,000 and you have a tax-exempt grant or forgivable loan to cover $30,000 of that cost from a local foundation, you can still claim the full $15,000 tax credit (30% of $50,000). The tax-exempt grant or forgivable loan amount plus the tax credit amount may not exceed the total project costs used to calculate the credit ($50,000 in this example).