Summary: Many tax-exempt organizations may be eligible to receive direct payments tied to qualifying clean energy tax credits. Changes introduced under the OBBBA have reshaped the incentive landscape for these organizations, placing great emphasis on project timing, supply chain considerations, and proactive planning.
Federal tax credits help businesses offset the cost of energy, infrastructure, and sustainability investments. Tax-exempt organizations, however, had to watch from the sidelines, as they often could not access those incentives, leaving significant sources of project funding unavailable to nonprofits, public schools, and local governments.
Eligible tax-exempt organizations and governmental entities have been able to access certain clean energy incentives through elective pay (also known as direct pay) since the Inflation Reduction Act (IRA) in 2022. This enables eligible organizations to receive the value of certain federal tax credits as a cash payment from the IRS. Because these organizations could not claim tax credits due to their tax-exempt status, refundable payments provide a valuable alternative to benefit from clean energy incentives.
However, tax-exempt organizations should be aware of revisions introduced under the One Big Beautiful Bill Act (OBBBA) that are reshaping direct pay rules around timing, eligibility, and sourcing. For nonprofits, school districts, and other tax-exempt entities, understanding these changes is essential to maximizing valuable funding opportunities.
What is direct pay and how does it benefit nonprofits?
Traditionally, tax credits only provided value if a taxpayer had sufficient tax liability to offset. For many nonprofit organizations, this created a fundamental limitation. Even when investing in eligible solar equipment, battery storage systems, or other qualifying energy property, these entities could not monetize the associated credits.
Under the IRA, eligible organizations can elect to receive the value of certain clean energy tax credits as payment from the IRS. In practice, direct pay functions as a reimbursement mechanism, in which tax credits are converted into direct financial benefit for entities that otherwise could not use it.
Why direct pay matters for nonprofits
Nonprofits frequently operate under constrained budgets while maintaining large facilities and extensive operational responsibilities. Whether running community centers, educational institutions, museums, healthcare facilities, religious organizations, or social service programs, many nonprofits face ongoing pressure to improve facilities while controlling costs.
Many organizations have missed out on federal energy-related tax credits because of misconceptions around eligibility and benefits, but there are many opportunities available today to claim direct pay for qualifying projects.
Examples may include:
- Solar energy installations
- Battery energy storage systems
- Geothermal systems
- Certain clean energy infrastructure investments
- Energy efficiency initiatives associated with eligible credits
- Other qualifying clean energy technologies
For organizations already considering facility upgrades, deferred maintenance projects, or sustainability initiatives, these incentives may generate significant reimbursements depending on project type, costs, and compliance with applicable requirements. Direct pay may reduce the effective cost of a qualifying investment by a meaningful percentage, creating additional flexibility for mission-focused spending and program expansion.
How do the new rules under the OBBBA affect clean energy tax credit eligibility?
Beginning in 2025, the OBBBA introduced new rules, deadlines, and eligibility requirements that may affect credit availability for nonprofits. Among the most notable changes are accelerated timelines and additional compliance considerations for certain clean energy projects.
Begin-construction and placed-in-service deadlines
- Solar and wind projects applicable under §45Y and §48E that began construction after July 4, 2026, must be placed in service by December 31, 2027.
- Projects that began construction before July 5, 2026 do not have a placed-in-service deadline; however, they are still subject to any future reduction in the credit percentage resulting from the four-year phaseout schedule under the IRA, which is expected to start in 2032.
Supply chain considerations
- For projects with construction beginning after December 31, 2025, a §45Y qualified facility or §48E qualified facility/energy-storage technology can become ineligible for the credit if it receives too much “material assistance” from a prohibited foreign entity (PFE). This means only a certain specified percentage of direct costs of manufactured products and components can be mined, produced, or manufactured by a PFE, such as China.
- The allowed percentage of material assistance will decrease by 5% every year through 2030.
These rules are most likely to impact solar system projects, which contain components often derived from international supply chains. If projects feature excess material assistance from prohibited entities, the property is not eligible for federal incentives.
As a result of these new rules, organizations considering solar, energy storage, geothermal, or other clean energy investments should evaluate incentive eligibility early in the project planning process rather than after construction begins. Waiting too long could result in missed opportunities or reduced credit availability.
What common misconceptions prevent nonprofits from claiming clean energy tax credits?
Many nonprofits and tax-exempt organizations are unaware that they may qualify for federal incentive opportunities due to several common misconceptions.
- “We’re a nonprofit, so tax credits don’t apply to us.”
This was often true in the past, but direct pay provisions enable qualifying tax-exempt entities to access the economic value of certain credits without having taxable income.
- “We aren’t installing a massive solar farm.”
Many small projects may merit evaluation, such as rooftop solar installations, battery storage systems, geothermal projects, and infrastructure improvements, depending on the organization’s circumstances.
- “We’ll look into the credits after the project is finished.”
This approach is risky, because eligibility depends on project planning decisions, procurement strategies, documentation practices, labor requirements, timing considerations, and compliance with evolving guidance. Addressing these issues after project completion may limit available benefits.
- “The process seems too complicated.”
While the rules can be complex, organizations do not need to navigate them alone. Experienced tax credit specialists can help determine whether projects qualify, estimate potential benefits, identify compliance requirements, and support the filing process.
How can tax-exempt organizations incorporate refundable tax credits into strategic planning?
For many nonprofits, school districts, and tax-exempt organizations, the ability to recover a portion of project costs through refundable tax credits may affect broader capital planning decisions. By incorporating available incentives into project budgeting, organizations may be able to reduce the net cost of qualifying improvements and make planned investments more financially feasible.
In light of the new considerations of the OBBBA, here are a few actions your organization can take:
- Review planned capital projects. Facility upgrades, renewable energy installations, energy storage projects, or other infrastructure investments may qualify for direct-pay eligible credits. Even projects already included in capital plans may merit reevaluation given the availability of refundable incentives.
- Consider timing early in the planning process. Recent changes in begin-construction and placed-in-service requirements for certain initiatives require organizations to align project timelines with applicable deadlines to ensure credit eligibility.
- Assess supply chain considerations. For projects that may be affected by material assistance restrictions, organizations should discuss sourcing considerations with vendor and advisors early in the procurement process to avoid compromising eligibility.
- Coordinate with tax advisors before construction begins. Because eligibility depends on multiple factors, including project type, timing, and compliance requirements, early planning with an experienced advisor may help maximize available funding and avoid costly surprises later.
Final thoughts: how tax-exempt organizations can benefit from clean energy tax credits
Many nonprofits, school districts, and tax-exempt organizations have missed opportunities in recent years to benefit from federal clean energy tax incentives due to misconceptions around availability. With direct pay, eligible organizations such as tax-exempt organizations, governmental entities, and school districts can benefit directly from clean energy tax credits to offset project costs and improve ROI.
Navigating these projects and claiming the applicable tax credits requires more than simply identifying a qualifying project. Enlisting the help of a knowledgeable tax credit specialist can help organizations understand evolving eligibility requirements, project deadlines, supply chain restrictions, and compliance considerations to help maximize available credits.
