Key Takeaways:
- The Inflation Reduction Act (IRA) passed in late 2022 impacts tax-exempt organizations, offering benefits such as reduced construction costs through the allocation of building tax deductions to qualified designers.
- All tax-exempt entities are now entitled to allocate their building tax deductions to qualified designers, potentially helping to negotiate better prices for construction projects that prioritize energy efficiency.
- The IRA also allows eligible tax-exempt organizations to receive cash payments from the IRS for certain tax credits, expanding the benefits available to non-profits, particularly in the realm of clean energy initiatives.
When the Inflation Reduction Act (IRA) was enacted in late 2022, it may have seemed that its tax provisions wouldn’t impact your tax-exempt organization. That’s not the case. One IRA provision could aid in lowering construction project expenses if you use energy-efficient materials and qualified labor, while another provision could offer direct cash payments for specific tax credits. It’s important for non-profits to revisit the IRA and its provisions.
Inclusion of All Tax-Exempt Entities
Following the passage of the Consolidated Appropriations Act of 2021, which made the IRC Section 179D tax deduction for energy-efficient buildings permanent, commercial and certain residential property owners gained access to the deduction by assigning it to eligible “designers.” While some government entities were eligible, the majority of non-profits were not.
With the enactment of the IRA, all tax-exempt organizations became entitled to allocate their building tax deductions to qualified designers. Whether you prioritize energy efficiency due to its alignment with your mission and values or simply to reduce future utility costs, the Sec. 179D deduction can now assist in mitigating upfront expenses for construction projects incorporating sustainable elements.
Qualified designers develop technical specifications for the installation of energy-efficient commercial building property. Mere installation, repair, or maintenance of such property does not qualify for the deduction. Designers may include architects, engineers, contractors, environmental consultants, and energy services providers.
Understanding the Allocation Process
To illustrate how the allocation process functions, let’s consider an example. Suppose your non-profit intends to construct a 40,000 square foot LEED-certified building and has $200,000 in tax deductions to allocate to qualified architects, engineers, and other construction professionals. You can assign the entire Sec. 179D deduction to a single designer or distribute proportional allocations among multiple designers. This approach can facilitate negotiating a more favorable overall project cost.
The precise deduction amount is determined through a Sec. 179D study conducted by the designer. This study, performed by a qualified contractor or professional engineer, involves a site visit to confirm compliance with energy-saving requirements. Additionally, you must execute an allocation letter detailing the cost of the energy-efficient property (including labor), the property’s placed-in-service date, the allocated Sec. 179D deduction amount, and a declaration of the information’s accuracy and completeness.
It’s important to note that seeking or accepting payments from a designer in exchange for providing an allocation letter is prohibited. Similarly, you cannot demand a portion of the deduction’s value from a designer.
Cash Refunds for Tax Credits
Beyond broadening the accessibility of the Sec. 179D tax deduction, the IRA permits eligible tax-exempt organizations to receive certain tax credits as cash payments from the IRS. Previously, most tax credits were of no utility to non-profits.
Under the “direct pay” provision, organizations can partake in clean energy benefits associated with credits such as the Investment Tax Credit, Production Tax Credit, Advanced Manufacturing Production Credit, Commercial Clean Vehicle Credit, and Alternative Fuel Vehicle Refueling Property Credit. The IRS disburses credit payments once an eligible non-profit submits its return for the relevant year.
Seek Professional Guidance
Reach out to us for a comprehensive list of federal tax credits that could potentially enable your non-profit to receive cash payments. Moreover, if you’re contemplating a construction project, contact us about eligibility for Sec. 179D deductions.
