The Inflation Reduction Act includes a provision allowing tax-exempt entities to receive the solar investment tax credit as a direct payment. In the past, to make nonprofit solar projects financially viable, most organizations had to partner with developers or banks that could take advantage of the tax benefits. Organizations would sign power purchase agreements (PPAs) where they would pay the bank or developer a set amount of money for the solar energy over a length of time, usually 25 years.

Now, tax-exempt organizations like public schools, cities and nonprofits can get those credits by direct pay, and receive a check for 30% of the project cost just like a tax-paying entity would receive the credit when filing taxes. Direct pay paves the way for organizations to own solar projects instead of just buying the power through PPAs.

Although the industry is awaiting official guidance from the Treasury Department regarding the logistics of direct pay and other IRA provisions, the basic qualifying factors are spelled out in the statute. Here are the entities that can access direct pay for the solar ITC.

1. Tax-exempt organizations

Any organization that has filed an application with the federal government for tax-exempt status will qualify for direct pay, according to Amit Kalra, partner at Sheppard Mullin. This could include state colleges and universities, nonprofit organizations and more. It likely does not include homeowners’ associations (HOAs), which typically file a corporate income tax return, Kalra said.

2. State, local and tribal governments

Any governmental entities can receive direct pay for the solar ITC. This includes an already-hot market segment — public schools. A 2020 report by Generation180 found 7,332 schools nationwide use solar power, a number that’s surely grown since then.

3. Rural electric cooperatives

Rural electric co-ops have been leaders in solar adoption because of their member-centric structure. Co-ops now qualify for direct pay, allowing them to own their solar projects and receive credits directly.

4. The TVA

The Tennessee Valley Authority is a federally owned electric utility corporation that can now receive direct pay for solar projects.

How will direct pay change nonprofit solar project financing?

To take advantage of direct pay, tax-exempt entities will likely get a bridge loan from a solar installer or bank, pay the government incentive amount back to the loan company once they receive it, then pay the rest on an installment plan, Kalra said.

“The same parties that are currently willing to underwrite PPAs and take the credit exposure to a tax-exempt [entity], I don’t see why they wouldn’t be willing to underwrite a construction loan to a tax-exempt [entity], or a term loan for that matter, and say, ‘Here’s your $100. You go install this facility and then you pay us back,'” he said.

Fellow Sheppard Mullin partner Benjamin Huffman said financiers previously set up a similar payment structure for cash grants for solar installations.

“It was essentially borrowing against that future government payment, which could be structured for this program just as easily,” Huffman said.

The ability for nonprofits to own solar projects could make energy savings and sustainability an option for more organizations than ever before.

“Having these entities be able to access the systems directly and own the systems if that’s what they choose is a huge step forward for energy sovereignty,” said Andie Wyatt, policy director and legal counsel at GRID Alternatives.