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Federal Law Allows Tax-Exempt Entities to Cash In on Energy Tax Credits

Tax-exempt entities (including non-profits, states, local governments and public schools) that are planning energy-efficient projects, such as solar improvements to existing buildings or improvements to provide for electric vehicles, should be aware that the U.S. Treasury may now provide direct payments to those entities to reduce project costs.

New regulations under the Inflation Reduction Act, which have been published as Notice 2022-61, provide some clarification for the rules on how to qualify for these increased direct pay credits under the prevailing wage and apprenticeship requirements. 

Prior to the federal Inflation Reduction Act of 2022, Investment and Production Tax Credits were directly available only to for-profit entities that could offset the tax credits with their taxable income. Therefore, tax-exempt organizations, public schools and governmental entities could only take advantage of tax credits through joint ventures with for-profit entities. Now, tax-exempt organizations, such as 501(c)(3) hospitals and colleges, public schools and governmental entities can receive direct payments from the federal government equal to the value of the tax credits, as determined pursuant to the Internal Revenue Code. 

It is possible to obtain a credit of up to 50% of qualified costs. To obtain the maximum benefit of the direct payments, projects must adhere to prevailing wage and apprenticeship requirements, use United States-sourced materials, and be located in certain communities. Adherence to the prevailing wage and apprenticeship requirements produces a tax credit equal to 30% of qualified costs. However, failure to meet these requirements produces a credit of only 6% of qualified costs.  Sourcing sufficient materials for the project from the United States can net an additional 10% of qualified costs in tax credits. Locating the project in certain communities can net an additional tax credit of 10% of qualified costs.

While these requirements are complicated, the potential amount of direct payments is substantial. Planning and preparing for obtaining these credits can start now, and the benefits may apply to projects that have already commenced. Please contact your Miller Canfield attorney if you are considering an energy project.

© 2023 Miller, Canfield, Paddock and Stone PLC National Law Review, Volume XIII, Number 23

About this Author

Christie R. Galinski Tax Lawyer Miller Canfield

Christie Galinski is a tax attorney with more than 12 years of sophisticated transactional experience providing research and analysis regarding federal, state and international tax issues.

Christie's practice has focused on transactional tax issues, such as investment funds (including RICs and REITs), international tax issues, state tax issues, FATCA, tax-exempt organizations, formation of entities, 1202 stock, mergers and acquisitions, the CARES Act and other COVID relief. She also has experience requesting private letter rulings and closing agreements with the Internal Revenue...

Samuel L. Parks  Tax Lawyer Employment and Labor Troy, Michigan, Miller Canfield

Samuel Parks is an associate in Miller Canfield's Corporate Group, with a focus on transactional and particularly tax work. He also has experience advising both public and private sector clients on employee benefit issues, including facilitating corrections of plan documentation and operational compliance failures, as well as drafting plan documentation and participant communications. A graduate of the University of Michigan Law School, he has previously worked at the Michigan Supreme Court and the Washtenaw Public Defender's Office. 

Karen L. Boore Troy Real Estate Attorney Miller Canfield
Senior Attorney

Karen Boore is a senior attorney at Miller Canfield, where her practice focuses on real estate development, renewable energy projects and leasing. Karen has represented lenders, investors and a utility company developer/acquirer in multiple wind energy projects. Karen has a particular expertise in resolving complex title issues and negotiating insurance coverages with title companies to confirm that the rights necessary to build and operate a project are in place and that conflicting third-party rights are adequately addressed. In her commercial leasing work, Karen...

Katrina Piligian Desmond Detroit Tax Attorney Miller Canfield

Katrina Piligian Desmond is a Principal at Miller Canfield's Detroit office. She is one of a very small number of attorneys nationwide who work extensively in the area of law dealing with the highly complex Internal Revenue Code Section 103, specializing in the rules relating to the issuance and post-issuance compliance for tax-advantaged bonds.

Katrina has extensive experience in matters related to federal tax opinions on tax-exempt bonds, financing capital projects and infrastructure improvements, economic development and environmental...