Direct Pay for Not-for-Profits

MATTHEW SOCHA: Welcome, and thanks for listening to Cherry Bekaert's Not-for-Profit Podcast Series. In each episode, we hear from the best in the business on the latest challenges, trends, and opportunities affecting not-for-profit organizations and educational institutions. I'm Matthew Socha, leader of Cherry Bekaert's Not-for-Profit Industry Practice.

AMY DOSICK: Hello. I'm Amy Dosick and I lead Cherry Bekaert's Not-for-Profit Tax Practice. I'm excited to be here today to talk about the direct pay program for government and not-for-profit entities. I have here with me our team of experts, so I'll throw it over to Martin Karamon to introduce his team.

MARTIN KARAMON: Thank you. My name, as Amy said, is Martin Karamon. I'm the head of our Tax Credits and Incentives Advisory Group here at Cherry Bekaert. Our group is made up of about 50 professionals and we focus on everything from some of the Inflation Reduction Act benefits we're going to talk about today to research credit studies, cost segregation studies, and beyond.

MARTIN KARAMON: I'm accompanied today by Timothy Doran and David Momani from my team. One of the things that's been great is that historically we've worked with many not-for-profits around the Employee Retention Credit Program, and we're excited to continue those relationships and develop more with respect to some of the direct pay benefits. Timothy and David, please introduce yourselves.

TIMOTHY DORAN: Thank you, Martin and Amy. I'm Timothy Doran, a director in our energy credit practice, working with Martin, Amy, and David. I've been here for a little over half a year. Prior to joining, I served as counsel for a large utility and an energy developer.

TIMOTHY DORAN: The Inflation Reduction Act opened up many new opportunities for a lot more people to take advantage of these credits and pursue clean energy, and I'm excited to be here to talk about that.

DAVID MOMANI: I'm David Momani, a manager on our tax credit group. I spent about seven years in the renewable energy tax credit space working on the financial modeling associated with these credits. I've been with Cherry Bekaert about nine months now, working on all things related to the Inflation Reduction Act.

AMY DOSICK: Can we start by talking a little bit about the Inflation Reduction Act and what the new direct pay program is for government and not-for-profit entities?

TIMOTHY DORAN: Prior to the Inflation Reduction Act, tax credits for solar and wind were primarily available to large institutional players like utilities and large developers. The Inflation Reduction Act of 2022 made these types of credits available to many more entities.

TIMOTHY DORAN: One of the unique aspects, not just in the energy credits space but in federal tax generally, is that not-for-profit, tax-exempt organizations and governmental organizations that don't typically operate much in the federal tax realm can now avail themselves of these credits and receive payments for qualifying activities.

AMY DOSICK: Who's eligible to receive these credits?

TIMOTHY DORAN: On its face it seems straightforward, but the space is evolving quickly with ongoing IRS guidance. When Congress passed the law, it listed several categories eligible for direct pay, including tax-exempt organizations, states, local governments, Indian tribal governments, and agencies of those governments.

TIMOTHY DORAN: Proposed regulations initially referred to specific tax-exempt classifications, but final regulations released recently indicate that 501, 530, and 528 tax-exempt organizations qualify. Generally speaking, most tax-exempt organizations and governments will qualify, but if an entity is only recognized at the state level and not federally, additional technical analysis may be required.

AMY DOSICK: How do organizations apply for the credit? What is the process?

TIMOTHY DORAN: Step one is identifying and pursuing a qualifying activity. A wide range of energy and energy-efficiency credits fall under the Inflation Reduction Act, and almost all qualify provided you're an eligible entity. Eligible technologies include clean energy vehicles, EV chargers, solar energy, battery storage, geothermal, and many others.

TIMOTHY DORAN: Once you've identified an investment, determine your tax year so you know when to file your form. Make sure you satisfy eligibility requirements and collect the required documentation, including any items needed to support enhancements to the credits.

TIMOTHY DORAN: After placing the technology in service, complete a pre-filing registration on the IRS website. The portal asks specific questions related to the credit and the technology and will issue a registration number. You'll need that number when filing a timely return with the appropriate forms to elect direct pay.

TIMOTHY DORAN: The IRS has stated it will attempt to make payment within 45 days after you've filed all required forms, received your registration number, and placed the property in service, though it remains to be seen how consistently they can meet that timeline.

AMY DOSICK: What are the benefits of direct pay? How much can organizations expect to receive in credits as a percentage of project costs?

TIMOTHY DORAN: It varies by technology and project. If you meet prevailing wage and apprenticeship requirements during development, a baseline credit might be 30 percent. That credit can increase to 40–50 percent or more depending on whether you meet additional requirements for your investment.

TIMOTHY DORAN: For example, on a $100,000 solar panel system, an eligible organization could potentially receive $30,000 to $50,000 back in the form of a tax credit paid by the U.S. Treasury, which is a significant incentive.

AMY DOSICK: Can you describe how your team helps clients apply for and monetize these credits?

TIMOTHY DORAN: We can get involved at the start by qualifying the project and determining whether a particular technology will qualify. We model the expected benefit and monetization timeline and estimate the net present value.

TIMOTHY DORAN: A core part of our work is documentation. We ensure that all the items the IRS will want to see are compiled and appropriate so clients claim the correct credit amount they are eligible for.

MARTIN KARAMON: We're trying to make the process as easy as possible for clients. Our preferred methodology is to begin with a brief discussion—often a half-hour—about projects they've undertaken recently and what they plan for the future.

MARTIN KARAMON: We frequently find clients are involved in projects they didn't realize were credit-eligible. We provide an information request that includes project descriptions, financials, and payments, which supports the documentation and cost calculations for the credit. Ultimately, we help clients apply through the portal for direct pay.

AMY DOSICK: For many of our clients, particularly state and local governmental entities that aren't used to being federal taxpayers, this is a rare opportunity to participate in a tax credit program. We're excited about what this means for state colleges and universities and other governmental entities investing in clean energy over the next several years.

AMY DOSICK: If listeners remember only one thing from this podcast, what should their takeaway be?

MARTIN KARAMON: Don't dismiss any project out of hand. Have a conversation with us or someone like us so you can investigate whether a project should be recorded on the appropriate tax return to get the benefit. You don't want to miss that opportunity.

TIMOTHY DORAN: To add to Martin, many organizations are already doing qualifying activities and may not realize it. If you haven't been thinking about it before, there's never been a better time to get involved with clean and efficient energy.

AMY DOSICK: Thank you for joining me today. I'm excited to discuss the opportunity for direct pay. If you want more information or would like a complimentary scoping discussion, you can reach me at amy.dosik@cbh.com.

MARTIN KARAMON: Thank you for leading this endeavor for the firm and for working with us on this.

AMY DOSICK: Thanks, everyone, and I hope you'll join us next time.

MATTHEW SOCHA: I hope you enjoyed this episode and look forward to our next one. Don't forget to subscribe.