How Nonprofit's Benefit from Inflation Reduction Act Tax Breaks

When the Inflation Reduction Act (IRA) became law in late 2022, many tax-exempt organizations might have overlooked its potential impact on their operations. However, buried within its provisions are opportunities for nonprofits to reap significant benefits, particularly concerning tax breaks. Let's explore how the IRA presents new avenues for tax savings and financial support for nonprofits.

Expanding Eligibility

 Previously, tax deductions for energy-efficient buildings under IRC Section 179D were limited to commercial and certain residential property owners, excluding the majority of nonprofits. However, with the passage of the IRA, all tax-exempt entities are now eligible to allocate these deductions to qualified designers. This means nonprofits can now leverage tax benefits to offset construction costs when incorporating sustainable materials into their projects.

Navigating the Process

The allocation process involves assigning tax deductions to qualified architects, engineers, and other construction professionals involved in energy-efficient building projects. For example, if your nonprofit plans to construct a 40,000 square-foot LEED-certified building, and you have $200,000 in tax deductions, you may allocate the entire Sec. 179D deduction to a single designer or make proportional allocations to multiple designers. This can help you negotiate a better overall price for the project.

To determine the exact deduction amount, a Sec. 179D study is conducted by a qualified contractor or engineer, verifying energy savings requirements. You'll need to provide detailed information, including the cost of energy-efficient property (including labor), placement date, and allocation to designers. It's crucial to adhere to IRS regulations, prohibiting payments from designers in exchange for allocation letters.

Unlocking Cash Refunds

In addition to expanding eligibility for Sec. 179D deductions, the IRA introduces the "direct pay" provision, allowing eligible nonprofits to receive cash payments from the IRS for certain tax credits. This includes benefits related to clean energy initiatives such as Investment Tax Credits, Production Tax Credits, Advanced Manufacturing Production Credit, Commercial Clean Vehicle Credit and Alternative Fuel Vehicle Refueling Property Credit, previously inaccessible to nonprofits. The IRS makes credit payments after an eligible nonprofit files its return for the applicable year.

Seeking Expert Advice

Navigating tax regulations can be complex, especially for nonprofits. It's essential to seek professional advice to maximize available tax breaks and ensure compliance with IRS requirements. Contact us for a comprehensive list of federal tax credits that may qualify your nonprofit for cash payouts. If you're embarking on a building project, inquire about eligibility for Sec. 179D deductions to capitalize on tax-saving opportunities.

How HoganTaylor Can Help

The HoganTaylor Nonprofit team of business advisors and CPAs is comprised of former CFOs, controllers, and industry experts with extensive experience providing the guidance organizations need to lean forward again in their leadership. If you have any questions about this content, or if you would like more information about HoganTaylor’s Nonprofit practice, please contact Jack Murray, CPA, Nonprofit Practice Lead.

INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.