Direct Pay Tax Credits: Paving the Way for Climate Action in Cities

In the face of escalating climate challenges, cities across the United States are taking proactive steps to reduce greenhouse gas emissions and enhance their ability to withstand the impacts of extreme weather events. However, implementing sustainable and climate-resilient solutions often comes with significant upfront costs, which can be a major hurdle for cash-strapped tax-exempt organizations and local governments. But now, thanks to the groundbreaking Inflation Reduction Act (IRA) of 2022, a new avenue for progress has emerged: Direct Pay Tax Credits.

The IRA, signed into law on August 6, 2022, is an unprecedented milestone in the nation’s climate and energy initiatives, with a staggering $370 billion in federal funding and tax credits earmarked for the cause. Among its provisions is a game-changing opportunity for tax-exempt entities, including local governments, to directly benefit from tax credits—a privilege previously limited to taxable entities.

The Introduction of Direct Pay Tax Credits

Historically, tax credits have been instrumental in driving the adoption of clean technologies like solar panels, wind turbines, and battery storage. However, these incentives were predominantly accessible to taxable organizations due to their ability to offset tax liabilities. Now, for the first time, the IRA enables non-taxable entities, such as cities and municipal bodies, to receive direct payments from the federal government equivalent to the value of certain tax credits. This new mechanism opens up exciting possibilities for cities to finance ambitious climate mitigation and resilience projects.

The Internal Revenue Service (IRS) has released proposed rules outlining the process for tax-exempt entities to receive direct pay tax credit payments. Although more details are expected to emerge, the current process involves pre-filing registration with the IRS, demonstrating eligibility, and submitting the appropriate tax forms, including Form 990-T and the relevant tax credit forms.

Fueling the Transition to Clean Energy

Cities now have a plethora of opportunities to utilize direct pay tax credits for financing various projects aimed at combatting climate change and building resilience. The following projects are eligible for the direct pay option:

1. Zero- and Low-Emission Vehicles: From electric cars to clean public transportation, cities can receive tax credits to bolster their fleets and promote emission-free transportation.
2. Charging and Refueling Stations: Investment in infrastructure for electric vehicle charging and alternative fuel refueling stations can be significantly supported through direct pay tax credits.
3. Renewable Energy Generation Systems: Cities can harness the power of solar, wind, and other renewable energy sources, while benefiting from tax credits to offset the initial costs.
4. Microgrids: Enhancing energy resilience and reliability through microgrid projects becomes more financially viable with direct pay tax credits.

Categories of Credits

The IRA covers a broad range of tax credits related to clean energy and carbon emissions reduction. Here are some of the key tax credits that cities can now access through the direct pay option:

1. Clean Electricity Production Tax Credit for Electricity from Renewables: Cities can receive tax credits based on the clean electricity produced and sold from renewable energy sources.
2. Investment Tax Credit (ITC) for Energy Property: This credit allows cities to offset a percentage of qualified investments in energy property, encouraging investments in clean energy infrastructure.
3. Clean Fuels: Tax credits are available for the production and utilization of clean fuels, promoting cleaner transportation options.
4. Clean Vehicles Credit: Cities can receive credits for purchasing qualified commercial clean vehicles, incentivizing the adoption of eco-friendly transportation solutions.
5. Clean Energy Manufacturing: Tax credits encourage the growth of advanced energy manufacturing projects, driving technological innovations.
6. Carbon Emissions Reduction Credit for Carbon Oxide Sequestration: Cities can receive credits for implementing carbon sequestration strategies, aiding in carbon reduction efforts.

Maximizing Climate Action through Direct Pay Tax Credits

With the IRA’s direct pay tax credits, cities now have a unique opportunity to make significant strides in their climate and sustainability goals. By tapping into federal funding and incentives, local governments can embrace renewable energy, electrified fleets, and resilient infrastructure without being burdened by the initial costs.

As the IRS continues to provide additional guidance on the implementation of these tax credits, it’s crucial for cities to consult with tax counsel and financial advisors to optimize their benefits. As the nation accelerates its journey towards achieving its Paris Agreement commitments, cities’ active participation in this transformative program can create a more sustainable, greener, and safer future for generations to come. The IRA’s direct pay tax credits have unlocked a new chapter in the fight against climate change, and it’s time for cities to seize the opportunity and lead the charge towards a cleaner, more resilient tomorrow.

Learn more about ways to keep our air and water clean at RVCCC.

The Rogue Valley Clean Cities Coalition’s mission is to enhance the livability of the Rogue Valley. We promote and educate on alternate fuels, seek to decrease dependency on petroleum, and promote clean air and water in the Rogue Valley via alternate fuels. Contact us today for more information!