IRA Guide for Nonprofits and Municipalities

How Direct Pay Works for Clean Energy Projects

Direct pay makes clean energy tax credits accessible to tax-exempt entities that have historically been unable to claim them to offset project costs. Through direct pay, tax-exempt organizations can receive a payment from the Internal Revenue Service (IRS) that’s equal to the tax credit amount for qualifying clean energy technologies or projects ^[1].

Direct pay empowers nonprofits and local governments to reduce their energy use and apply the associated savings to advancing their mission and services – all while supporting local clean energy jobs and New York’s climate goals .

Eligible clean energy projects placed in service after 2022 may qualify for direct pay. Whereas grant funding and loans can be competitive, direct pay is guaranteed for IRA-eligible projects that meet the requirements specific to that tax credit.

Who Is Eligible for Direct Pay?

Many government and non-government entities with tax-exempt status are eligible for direct pay, including^[2]:

• Nonprofit 501(c)(3), 501(d), and 501(a) organizations
• State, local, and territorial governments
• Tribal governments and their agencies
• Rural electric cooperatives
• Water districts, school districts, and economic development agencies
• Public universities and hospitals

Which Clean Energy Technologies Qualify?

There are 12 IRA tax provisions that are eligible for direct pay, including investments in manufacturing, clean vehicles, clean fuel production, clean energy generation, and carbon capture. However, tax credits for clean vehicles and clean energy generation represent the most applicable opportunities for many tax-exempt organizations to tap into IRA savings.

Tax credits for both plug-in hybrid and zero-emission vehicles are eligible for direct pay. Plug-in hybrid vehicles are eligible for a credit up to 15% of the cost, while zero-emission vehicles can receive a tax credit up to 30% of the cost. Clean vehicle tax credits are capped at $7,500 for light-duty vehicles and $40,000 for heavy-duty models, respectively^[3].

Vehicle charging and hydrogen fueling stations can also qualify for a direct pay credit of up to $100,000, or 30% of the project cost. Note that these projects must be located in eligible low-income and non-urban areas to qualify.

Renewable energy generation projects like solar and wind can claim direct pay through either the Investment Tax Credit (ITC) or Production Tax Credit (PTC). The ITC delivers an upfront tax credit that’s calculated as a percentage of the project cost, whereas the PTC provides a credit per kilowatt-hour for the renewable electricity generated during the first 10 years of a project’s operation.

The IRA increased the ITC to 30% of the cost of solar, storage, geothermal, and wind energy projects that meet labor requirements . Renewable energy projects that source domestic materials or are sited in low-income communities and designated energy communities can receive bonus credits of up to 40%, meaning a total combined tax credit worth 70% of the project cost.

Together, these tax credits make the direct ownership of renewable energy systems an increasingly affordable investment for tax-exempt entities to offset their own energy use or provide low-cost clean power to their communities.

Learn More: Solar and Storage – Inflation Reduction Act Funding

Applying for Direct Pay

There are several steps to applying for direct pay. But before initiating a clean energy project, check that it qualifies for a direct pay-eligible tax credit and meets the labor and domestic content requirements, if applicable.

Clean energy projects must be completed and put into service prior to accessing direct pay. Tax returns are due in mid-May of the year following the project completion for most tax-exempt entities. For example, tax returns and documentation on a solar project completed in October 2024 would be due by May 15, 2025, to claim direct pay^[4].

Tax-exempt entities need to register with the IRS before their tax return is due. The IRS will request information about the clean energy project, the credit you’re applying for, and your organization to complete the pre-registration process. Consider registering several months in advance of when tax returns are due ^[1].

Once a registration number is provided by the IRS, select elective payment on the IRS form and file your tax return by the deadline. Direct payment occurs once the tax return is processed by the IRS.

Since many tax-exempt entities are filing for the first time, the IRS has guidance for tax-exempt organizations filing tax returns and claiming clean energy tax credits.