Investment Tax Credits (ITCs) are essential for promoting clean energy projects. By understanding ITCs, you can make informed decisions and optimize your investments. In this blog, we will break down the fundamentals of ITCs and explore their benefits, including direct payments to nonprofit organizations and the transferability of credits for those lacking sufficient tax liability to fully utilize them.

What is an ITC?

An Investment Tax Credit (ITC) is a federal tax incentive aimed at encouraging investment in renewable energy and energy-efficient technologies. This credit allows eligible businesses and organizations to offset their federal income tax liability based on qualified expenditures for clean energy projects. The two main types of Investment Tax Credits (ITCs) are:

• Renewable Energy Tax Credits: Available for investments in renewable energy sources such as solar, wind, and geothermal. The credit is typically 30% of the cost of the installation. Production Tax Credit (PTC) is for when your system is large 1MW and the credit is based on the production output.
  • IRS Clean Energy Tax Incentives for Businesses
  • Department of Energy Summary of ITC and PTC Values Over Time
• Manufacturing Tax Credits: Designed to stimulate investment in new facilities and equipment. The credit can be up to 20% of the investment. (https://www.energy.gv/infrastructure/qualifying-advanced-energy-project-credit-48c-program)

Benefits for Nonprofits: Direct Pay Reimbursement

Historically, nonprofits without tax liabilities couldn’t directly benefit from Investment Tax Credits (ITCs). However, recent changes now allow tax-exempt entities—such as nonprofits, municipalities, and Tribal governments—to receive ITCs through direct pay reimbursement. Once a clean energy project is “placed in service,” these tax-exempt organizations can obtain a payment equal to the full value of the ITC and its bonus credits. To participate, entities must notify the IRS in their tax return and through pre-filing registration. (What Nonprofits Need to Know about the Investment Tax Credit).

Advantages for For-Profit Organizations: ITC Transfer

For Profit Organizations can leverage the transferability of Investment Tax Credits (ITCs) to their advantage. Here’s how:

• Monetizing Tax Credits: For entities unable to directly apply tax credits to reduce their own tax liability, selling these credits to other taxpayers offers a viable alternative for monetization. This transferability mechanism enables small businesses to bypass the time and resource demands associated with traditional tax equity structures. (Clean Energy Tax Credit Market Poised to Grow Under New Transferability Rules)
• Streamlined Process: The Inflation Reduction Act of 2022 has introduced significant changes, broadening the scope for for-profit businesses, partnerships, and select nonprofits to sell clean energy tax credits to qualified buyers. Under these updated regulations, eligible taxpayers can now directly transfer or sell various clean energy credits, including the Section 45 renewable energy production tax credit, the Section 48 energy investment tax credit, and the Section 30C alternative fuel refueling property credit. This simplified framework expands the market, drawing interest from a more diverse array of companies, including smaller public businesses and family offices. (Clean Energy Tax Credit Market Poised to Grow Under New Transferability Rules)
• Credit Value: ITCs are generally worth 30% of the “qualified investment basis” if the project meets specific requirements. Certain bonus credits, such as those for projects using domestic content, serving low-income communities, or operating in energy communities historically dependent on fossil fuels, can push the total credit value to 50% or beyond. However, sellers must prove their qualification for bonus credit amounts during due diligence. (Clean Energy Tax Credit Market Poised to Grow Under New Transferability Rules

Transferability of ITCs

Negotiating with Third-Party Buyers

Transferability allows entities that qualify for Investment Tax Credits (ITCs) but can’t use direct pay to transfer all or part of the credit to third-party buyers in exchange for cash. The terms and pricing are negotiated between the buyer and seller. This flexibility encourages collaboration and helps accelerate clean energy adoption. For example, if your organization develops a solar project, you can transfer the ITC to a buyer who can utilize it effectively. (Elective Pay and Transferability)

Transferring ITCs: Limitations

While transferring ITCs offers flexibility, there are limits and rules to consider:

• Transfer Cap: There is no explicit cap on the amount of ITC that can be transferred, but it must be within the credit earned by the transferor.
• Non-Refundable: Transferred credits cannot be refunded. They are only useful to the extent the transferee has a tax liability.
• One-Time Transfer: ITCs can only be transferred once. Once transferred, the transferee cannot retransfer the same credits to another party.
• Recapture Rules: If the property generating the ITC is disposed of or ceases to be qualifying property before the end of its recapture period, the transferor may be required to recapture part or all of the credit. This risk must be clearly outlined in the negotiation terms and documentation.

For detailed regulations and procedures, refer to the IRS resources on elective pay and transferability (source: https://www.irs.gov/credits-deductions/elective-pay-and-transferability).

Tax Deduction

Though there is not a tax credit for energy efficiency projects there is a tax deduction

• Energy Efficiency Tax Deduction: Building owners may be eligible for a tax deduction under IRC Section 179D for installing or retrofitting their property with energy-efficient commercial building property. The deduction amount may increase based on energy savings or meeting certain requirements. (Energy Efficient Commercial Buildings Deduction)