Shedding light on types of federal funds and energy upgrades

By Nate Heiking

The Inflation Reduction Act (IRA) and the Infrastructure Investment Jobs Act (IIJA) are two federal laws that present tremendous opportunities for implementing energy-efficient upgrades, such as new interior lighting systems. However, given the intricacies of these laws, understanding how businesses can counsel clients to take advantage of them for their next project may be daunting. The beginning of the new year is the perfect time to break down the details of the laws—as they pertain to both tax-exempt and for-profit organizations—and review what projects qualify, examine funding sources, and determine the next steps.

Understanding IRA and IIJA

The IRA directs nearly $400 billion in federal funding to clean energy, with the goal of substantially lowering the nation’s carbon emissions by the end of this decade. The funds will be delivered through a mix of tax incentives, grants, and loan guarantees.

The IRA plays a significant role, one of them being that it opens up investment and development opportunities driven by tax credits for tax-exempt organizations, such as local governments, higher education institutions, and hospitals, which were previously unavailable prior to this bill being passed. Before, tax credits were generally only applicable to entities such as for-profit corporations that had taxable income to offset. The IRA solves this problem with a new approach to tax credit incentives, which is a game-changer for tax-exempt entities because the law includes a new direct pay provision that allows tax-exempt entities to monetize applicable tax credits. Exempt organizations can now treat earned tax credits as an “overpayment of taxes” and receive a direct payment from the U.S. Treasury as a tax refund.

For tax-exempt entities, the IRA direct-pay option alleviates a long-time obstacle to participating in climate-friendly activities encouraged by these credits. Before the IRA’s direct-pay option, it was more expensive for tax-exempt organizations to take advantage of energy-saving technologies than for-profit taxpayers because tax-exempt organizations generally have little or no tax to offset against tax credits.

Specifically for tax-exempt organizations, the IIJA is another equally significant law that provides $550 billion in federal spending allocated over the next four years. The historic investments include projects ranging from clean energy to broadband and would significantly reframe the future of infrastructure in the U.S., while supporting schools and tax-exempt organizations to make critical energy upgrades. Funding for IIJA is through grants and loans, some examples are included in this article.