Tax-Exempt Entities Urged to Claim Solar Project Tax Credits
TL/DR –
The 2022 Inflation Reduction Act allows tax-exempt entities like cities, counties, municipal utilities, school districts and 501(c)(3) organizations to directly benefit from tax credits, including the investment tax credit for solar facility projects. They can receive these benefits as direct payments instead of tax credits, provided the solar facilities were placed in service after December 31, 2022. The process to claim these credits is multi-step, requires registration through an IRS online portal, and should be initiated at least 120 days before the due date of the applicable tax return where the credits will be reported.
The 2022 Inflation Reduction Act (IRA) has opened direct tax credits, such as the Investment Tax Credit (ITC) for solar facility projects, to tax-exempt entities such as cities, counties, municipal utilities, school districts, and 501(c)(3) organizations. Under the IRA, these entities can receive benefits through direct payments as an alternative to tax credits. Solar facilities that began operations after December 31, 2022, could be eligible for these direct payments. For more detailed information about the IRA and the direct payment option, visit our previous blog posts here and here.
The IRS has initiated a multi-step process for eligible entities to claim these tax credits via the direct payment election. The process, which can take several months to complete, begins with online registration on an IRS portal opened on December 22, 2023. This registration provides entities with an IRS-issued number necessary for all tax return filings related to the credits.
Entities must complete their pre-filing registration, which can only be submitted once per tax period, with all the credits they plan to claim. This registration should be done after the investment property or facility is operational, but not before the start of the tax period in which the tax credit is earned. Ideally, entities should register via the portal 120 days before the due date of the related tax return.
The next step involves filing all applicable tax returns needed to claim the credits, potentially including IRS Forms 990-T, 3800, and other specific tax credit forms like Form 3468. The deadline aligns with the due date for filing an annual tax return—if the entity were required to file a federal income tax return (typically the 15th day of the fifth month following the end of the organization’s taxable year). Note that there’s no relief for late direct pay elections.
Given that this process is new to all involved parties this year, it’s crucial to start early and seek the assistance of informed professionals to guide through the entire process.
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