Virginia Mercury Publishes Eric Hurlocker Article on Impact of Inflation Reduction Act “Direct Pay” Provision for Tax-Exempt Entities
GreeneHurlocker partner Eric Hurlocker recently wrote a commentary piece published by the Virginia Mercury addressing the implications of the Inflation Reduction Act’s “direct pay” provision on tax-exempt entities.
Historically, federal tax incentives for investments in renewable energy projects were geared to individuals and entities with taxable income to offset. This meant that tax-exempt entities, such as local governments, higher education institutions, and other 501(c)(3) organizations could not take advantage of tax incentives.
As Eric explains in the article, direct pay changes the way tax incentives work, which is why it’s expected to be a “game changer” when it comes to tax-exempt investment in renewable energy projects.
In particular, local governments and higher education institutions, as well as other exempt organizations, can now treat tax credits they have earned as an “overpayment of taxes” and receive a direct payment from the U.S. Treasury as a tax refund.
The IRA also expands the scope of the types of tax incentives now available, including production tax credits and investment tax credits for wind, solar, geothermal, combined heat and power and other technologies; investment tax credits for electric charging stations; production tax credits for zero-emissions nuclear power facilities; and incentives for carbon capture, clean hydrogen, and investments in certain manufacturing facilities, among other things.
In practical terms, what this means is that renewable energy projects are now much more viable for tax-exempt entities to pursue. Without access to federal tax credits, a project, such as the development of a new solar grid, may have had a payback period—i.e., the time it takes to recoup an investment—of 15 to 20 years. With the incentives available under the IRA, which may cover approximately 50% of the cost of building renewable energy production, the payback period can be shortened to 8 to 10 years.