Will governments decipher Inflation Reduction Act tax credits?
TL/DR –
The Inflation Reduction Act (IRA) has allowed governments to access tax credits for the first time, aimed at funding clean energy and other green projects. Consequently, the U.S. Treasury has introduced the “direct pay” program, enabling tax-exempt organizations such as local, state, and tribal governments to be paid directly once a project is completed and an application has been submitted after the end of a tax year. However, the program has been under-marketed and is widely regarded as being complex and confusing, with different types of tax credits having varying restrictions, although it does offer substantial funding for governments committed to achieving net-zero emissions and transitioning to electric vehicles.
How Can Governments Benefit From Tax Incentives for Clean Energy Investments?
The Inflation Reduction Act (IRA) has made it possible for governments to benefit from tax incentives. With billions dedicated to funding clean energy and green investments, the IRA tax credits present a unique opportunity for local, state, and tribal governments.
The major challenge is understanding how tax-exempt entities, like governments, can receive tax credits. The U.S. Treasury introduced a program called “direct pay” as a solution. Governments can access these tax credits through a pre-registration filing after a project is completed, followed by an application at the end of the tax year. This allows them to receive up to 30% of the project costs along with additional bonus credits.
A $100 million investment in green energy such as solar, wind, or geothermal can qualify for a $30 million return from the Internal Revenue Service. If the project is in a low-income community, the return can increase to $50 million. Use the DOE’s map to check eligibility.
Investments in electric vehicle purchases, charging infrastructure, rooftop solar panels, and more qualify for direct pay. However, the lack of marketing and complex processes have limited the widespread usage of these tax credits.
The requirements vary for each type of tax credit, with some being eligible for “direct pay” and others not. The sourcing of materials, project commencement dates, and other factors also affect the eligibility. The U.S. Treasury has been actively trying to simplify and clarify these regulations, but understanding them can still be daunting, particularly for local government officials.
Despite these challenges, the opportunity these tax credits offer for public investment is significant. Governments can access substantial funding to meet their environmental objectives. Here are four steps to get started:
- Review the IRS’ guidelines on Elective/Direct Pay and the types of projects that qualify.
- Watch the pre-filing registration video to understand the application process.
- Identify existing and potential projects that are eligible for tax credits.
- Assess whether your current resources can provide tax guidance and support tax-credit applications, or if these services need to be outsourced.
The IRA may seem confusing now, but with time and effort, it can become a valuable tool for meeting climate goals. The time to start learning is now.
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