How do schools get reimbursed by the Federal government?
Schools are most likely to take advantage of the following tax benefits included in the Inflation Reduction Act.
The three tax credits (Sec 48, Sec 45W, Sec 30C) all combine with Direct Pay (Sec 6417) to deliver cash reimbursements to schools.
In contrast to tax credits, the tax deduction (Energy Efficient Commercial Buildings Deduction 179D) can only be claimed by the designer (e.g. architect or engineer who writes the technical specifications).
Read below to explore and learn more about these five key tax benefits in the IRA for schools.
For more information about solar at schools, energy storage, ground-source heat pumps, electric school buses, charging infrastructure, and energy efficiency, visit What does the IRA support in schools.
Investment Tax Credits (ITCs) are applied to the upfront costs of installing clean energy systems such as solar, storage, or geothermal HVAC systems. Billions of dollars are available over the next decade for clean energy projects that begin construction before 2035 with the following features:
Non-competitive: no “application” and schools will not be competing against one another for limited funds
Uncapped: an unlimited number of schools can participate and there is no limit on the total credit amount eligible to schools
Paid as a cash payment to non-taxable entities (“Direct Pay”)
Can be combined with other clean energy tax credits
New construction and retrofits are eligible
Qualifying geothermal projects are eligible for a credit of up to 50% — and qualifying solar and wind projects could qualify for a credit of up to 70% — of their costs to install clean energy technology. This assumes a 30% base credit* with possible bonus credits, which are stackable, including:
10% bonus for domestic content that uses the required amounts of domestically produced steel or iron, and manufactured products
10% energy community bonus for projects in an energy transition community
10-20% bonus for projects located in a low-income community or on tribal lands
Plus, in addition to these savings for upfront installation, clean energy technologies can save operating costs over the lifetime of the product.
* Projects with a maximum output of less than 1 megawatt (MW) are automatically eligible for 30% credit. Projects over 1 MW that do not comply with prevailing wage and apprenticeship requirements will see a reduction in the base credit from 30% to 6%.
** 20% bonus is only available utilizing the ITC for solar and wind projects, with maximum net outputs of 5MW; application required.
The Qualified Commercial Vehicle Tax Credits are applied to the upfront costs of purchasing qualifying electric vehicles. Here are the key features:
Size of Credit: Maximum amount of tax credit for school buses is $40,000/vehicle
Non-competitive: no “application” and schools will not be competing against one another for limited funds
Uncapped: an unlimited number of schools can participate and there is no limit to how many vehicles the tax credits can be applied to
Paid as a cash payment to non-taxable entities (“Direct Pay”)
Can be combined with federal grants and rebates for electric school buses
Click here to view a list of eligible manufacturers for qualifying electric school buses. For more information see this resource on Commercial Clean Vehicle Credits and this fact sheet from the IRS, as well as an overview on 45W and help page from WRI's Electric School Bus Initiative.
The Alternative Fuel Refueling Property Credit is applied to the upfront costs of installing electric vehicle charging equipment for electric school buses or passenger vehicles. Here are the key features:
Eligibility: 30C is only eligible for charging infrastructure that is in a census tract that is either a non-urban area or a low-income community under 45D(e). Check the map to establish eligibility.
Size of Credit: Tax credit with max of 30% of costs, assuming fair wage & apprenticeship requirements are met, up to $100,000 per unit
Non-competitive: no “application” and schools will not be competing against one another for limited funds
Uncapped: an unlimited number of schools can participate and there is no limit to how many charging stations qualify for this tax credits
Paid as a cash payment to non-taxable entities (“Direct Pay”)
Can be combined with federal grants and rebates for electric school buses
For more information see guidelines from the IRS on Alternative Fuel Vehicle Refueling Property Credit, as well as a 30C explainer and help page from WRI's Electric School Bus Initiative.
The clean energy tax credits that schools are eligible for have a direct pay option which means schools and other tax-exempt organizations will be able to claim a tax-free cash payment from the IRS equal to the full value of the credits they earn.
It is no longer necessary to rely on third-parties to claim the credit and pass along a portion of the savings, which often resulted in a smaller savings for schools.
There is also no application process, like with a grant program, though schools will need to pre-register and be assigned a unique registration number by the IRS before they can “elect” a direct cash payment for the taxable year in which the project is placed in service.
The finalized rule on Direct Pay from the IRS provides additional detail.
Note: Direct Pay is often referred to as “Elective Pay.” These terms have the same meaning. For more on the pre-registration process, see the IRS guide and explore the Pre-Registration Portal for “Elective Pay”.
*Projects above 1MW must comply with domestic content requirements in order to take full advantage of Direct Pay benefits for projects commencing construction in 2024 or later. More information regarding Direct Pay and domestic content requirements is available here.
School districts and other non-taxable entities can now receive tax-free cash payments from the IRS for all earned clean energy tax credits through the following steps:
Identifying and pursuing the qualifying project and which tax credits they will claim.
Identifying the tax year to determine when the return will be due. Since schools do not have a tax year, the IRS recommends they use their accounting year as their tax year. Note, elective pay is eligible for tax years that start after December 31, 2022.
Completing a pre-filing registration requirement to notify the IRS of the intent to claim the credit. The IRS does not specify a deadline for that pre-filing registration process but recommends completing the process approximately 120 days before the filing deadline.
Satisfying all eligibility requirements for the tax credit and applicable bonus credits.
Filing an annual tax return (Form 990-T) by the annual filing deadline, typically May 15, using the registration number provided by the IRS following the pre-registration process.
Receiving payment after the return is processed.
For more information, see the IRS’ Elective Pay Overview and guide for registering for benefits through the Direct Pay portal.
If tax-exempt grants or loans are used to finance a component of the clean energy project or property, than the cost of the grant or loan plus the applicable credit cannot exceed the total cost of the eligible project or property. In this case, the amount of the applicable credit is reduced so that the total amount of funding received does not exceed the cost of the project.
However, grants and other non-taxable forms of support do not reduce the total project cost basis from which the elective pay reimbursement will be calculated.
For additional guidance, see Question 41 from the Direct Pay FAQs.
To the extent that a project is financed with tax-exempt debt and eligible for a tax credit, the amount of the tax credit is reduced by the lesser of (i) 15% or (ii) the portion of the qualifying project that has been financed with tax-exempt debt.
Because this a “lesser of” test, this allows such projects to be financed 100% with tax-exempt debt, while only reducing the direct pay tax credit by 15%.
For example, a project that is eligible for a 30% base credit + 10% adder would receive a total credit of 34%.
For more information, see JD Supra, “Inflation Reduction Act Levels Renewable Energy Playing Field for Tax-Exempt Entities” August 26, 2022.
The guidance from Treasury on the Investment Tax Credits and Direct Pay is in draft form and may change following a public comment period. We will update this space with new guidance as we continue to learn.
Click here to always find the latest guidance from the White House on the Direct Pay Provisions of the Inflation Reduction Act.
The 179D commercial buildings energy efficiency tax deduction is available for projects that install: (1) interior lighting systems; (2) a building envelope; or (3) heating, cooling, ventilation, or hot water systems that reduce the overall energy and power cost of the interior lighting, HVAC and service hot water systems.
Applies to both building retrofits and construction of new buildings
In contrast to tax credits, the tax deduction (Energy Efficient Commercial Buildings Deduction 179D) can only be claimed by the designer (e.g. architect or engineer who writes the technical specifications).
To qualify, the building needs to demonstrate a reduction in energy of at least 25% in comparison to a building meeting minimum requirements of ASHRAE Standard 90.1. Savings must be calculated through qualified computer software.
Goes into effect for property placed in service beginning January 1, 2023 and expires after December 31, 2031.
Do you have a project that will leverage incentives from the Inflation Reduction Act? We want to know. Tell us about it here.
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