6 Key Takeaways

Key takeaways from the video:

1. The Inflation Reduction Act has now come into full effect in 2023 and it includes the Direct Pay provision for tax-exempt organizations.
2. The Direct Pay provision allows non-profits, churches, synagogues, mosques, and other tax-exempt organizations to receive the 30% tax credit as a direct payment.
3. Before the Direct Pay provision, non-profits had to create a tax equity investor or a shell LLC to own the solar installation and take advantage of the tax benefits. This made it challenging for non-profits to get the tax benefit and stalled a lot of non-profit projects. The Direct Pay provision has opened the floodgates for non-profits, churches, and synagogues to go solar.
4. The Direct Payment is received in the beginning of the year after filing taxes or filing for the Direct Pay.
5. There are three additional adders that can increase the tax credit or direct payment beyond the 30%.The Domestic Content Adder is tied to a certain percentage of the equipment bundle that is manufactured domestically, and it can add another 10% to the tax credit payment.
6. The Low-Income Community and Energy Community Adders are provisions that target underserved areas and can increase the adders beyond 40%.

Direct Pay Video Summary

Direct pay is one of the most important provisions of the new Inflation Reduction Act, which was passed in August of 2022 and has now come into full effect here in 2023. Essentially what it means is that tax exempt organizations are now eligible for the Investment Tax Credit or ITC. And for anybody that’s following what’s going on in the solar world, this is brand new and very exciting.

Essentially, we’re now able to see non-profits, churches, synagogues, mosques, and other houses of worship, municipal entities, and many other tax-exempt organizations now get that 30% tax credit coming back to them as a direct payment. And that is just really reducing the cost of installation for solar and is increasing the return on investment for any solar project.

Life Before the Direct Pay Provision

Before the direct pay provision was introduced nonprofits really had to jump through some hoops and do some fancy legal maneuvering in order to take advantage of any of the tax benefits. What they needed was a tax equity investor or a shell LLC that was capable of owning the solar installation, and then taking that tax benefit.

The challenging thing is you needed an LLC that you created to have tax liability and essentially you had to create a solar holding company in order to get the tax benefit. That’s very challenging. It involves filing legal paperwork. It involves setting up an LLC, or involves knowing somebody who has a lot of tax liability, because for some of these projects, if you’re putting six figures into a large solar array you need to five, six figures worth of tax equity in order to get that money back. So it was very challenging and really what happened is that most nonprofits and houses of worship just didn’t do it.

And they were, if they ever did go solar, they were missing out on 30% of the cost coming back to them. And it really stalled a lot of nonprofit projects for Solar States. We’ve talked to hundreds of houses of worship at nonprofits in the Philadelphia area, and only a handful have actually gone solar prior to Direct Pay because of all these obstacles. Now, the floodgates are open, direct pay is possible, and we’re seeing a lot more churches, nonprofits, and synagogues taking interest in this sort of thing.

How does Direct Pay Work?

The way that it works is very similar to any solar array. You get installed and after you’re installed, there’s something that’s called the Permission to Operate, which is granted by your utility, otherwise known as PTO. This usually happens about a month after the installation. You get inspected by your local inspector, and then you get your meter swap by the utility and they grant you permission to operate, that PTO date is what’s the date that you know is in effect for the tax year.

And Whenever that PTO date happens, that’s when you’re gonna file for the tax credit or the direct payment. And so the following year you’re gonna say, ‘hey, I got PTO last year for my new solar system. Now I’m going to get my Direct Payment.’ For most people this is going to be coming in the tax cycle in the beginning of the year. Most people file their taxes sometime between January and April, and then you get a refund check or in this case, a Direct Payment, sometime in that first half of the year, after you filed your taxes or filed for the Direct Pay.

What are these ‘Adders’?

There are a lot of provisions in the Inflation Reduction Act and we’ve done our best to make sense of what’s a multi-hundred page omnibus tax bill and give you a little bit of an insight into what’s going on.

So the big news that was splashy when the Inflation Reduction Act happened was the tax credit amount, and that Direct Payment amount was increased to 30% and that 30% is holding for the next 10 years.

So about a third of the system cost is coming back to you. Now. On top of that, there are three additional adders that can increase that tax credit payment or that direct payment beyond the 30%. So one of the most critical adders that you may have heard about is referred to as the Domestic Content Adder.

Domestic Content Adder

Domestic Content is really The Biden administration’s push to have more solar panels, solar equipment and battery technology being manufactured here in the United States. And so they are going to look at where did you get your inverters from? Where did you get the racking from? Where did you get your solar panels from?

And as much as possible, we wanna see these produced in the United States. Now, the fact of the matter is not all of these technologies are currently being produced in the United States. And so what the Direct Pay is going to be tied to a certain percentage of the equipment bundle that’s actually manufactured domestically.

And our understanding is it’s going to be upwards of 50% of the manufacturing happening here, and they may also use close trading partners. And so this may include countries like Canada and Mexico, and we can say those may be considered part of domestic content. You take the 30% and you get your, products locally and from domestic content, you can add another 10% adding to 40% of the system costs coming back to you.

Low-Income Community Adder

There are two other really important provisions in this inflation reduction Act, which can increase your, adders beyond 40%. And both of these are specifically targeting areas that have been underserved by solar in the. And the goal here is to rectify some of the historical disinvestment that we’ve seen in low income communities, in tribal communities and in energy communities, which are places that have previously had fossil fuel extraction and / or production of coal-fired power plants and these sorts of things.

So just to name how these are going work, there is a 10% adder for any qualifying low income community. Now, they haven’t fully defined what this is going look like, but we’re most likely gonna be going off of census tracts as defined in the 2020 and 2021 census, and they’re going to be saying, ‘hey, is this project something that’s in a low income community? And you can get an additional 10% adder and if it’s actually a public housing building or a low income multi-family unit, you may be able to get as much as 20% on that low income.’

Energy Community Adder

That is huge and we think it’s so important to see low and moderate-income communities able to access solar, which has been previously unaffordable. This is really helping. And then, just to get back to this whole idea of energy transition and thinking about what are the regions of the country, what are the regions of every state that have been adversely affected by fossil fuel production, whether that’s a coal mine, whether that’s a refinery, whether that is, a pipeline coming through, something that’s, very significant fossil fuel infrastructure. And so they’ve defined energy communities, which is again, is going to be defined by your census tract.

And so if you are in a specific energy community, you may be able to see an additional 10%. So we’re now talking about a situation in which: let’s say you are a nonprofit or a church that’s in a historically disinvested low income community that’s also been facing, heavy fossil fuel infrastructure.

ENERGY COMMUNITY UPDATE MAY 8, 2023: The IRA Energy Community Tax Credit Bonus mapping tool displays data for qualifying energy communities affected by coal mine closures, coal-fired electric unit retirements, and fossil fuel employment. Updates will be made in May 2023, considering 2022 unemployment rates. Brownfields aren’t shown.

We’re now saying you could get up to 60% of your solar system cost back the next year as a direct cash payment. That is remarkable. And this is on top of what you’re going see in electricity savings and what you may see in SREC payments. And so we’re now seeing, a church or a nonprofit that, prior to the Inflation Reduction Act, wasn’t able to get the full Direct Payment or any ITC at all – they might have seen a 20-year payback period. They might have seen an ROI that was 5% or something like that. Now we’re seeing five to 10-year paybacks, making this much more appealing. And we’re seeing things where  16 to 20% ROI, which is beating the stock market in the S&P.

And so when we say that this is monumental legislation that’s really going to change the solar landscape, we say that the tectonic plates of solar have really shifted. And in 2023, now that all of these provisions have come into play we’re still learning more about it. But this is a really important time to look into solar and to look into some of the impact of the IRA.

Moving Forward

We have seen a huge uptick in nonprofits, in community organizations, in churches, synagogues, mosques houses of worship across the country and specifically here in the Philadelphia area and New Jersey taking more interest in solar due to Direct Pay.

The financials work out a whole lot better with solar. And so this is really what we’ve seen and coming down the pipeline with all of this is the fact that you now have municipal entities, you now have state entities, which of course are not taxed. If you have a borough hall or you have a fire department building, or you may have even just say a parking lot that is owned by a municipality or sometimes they own water treatment plants and they may own a large tract of land somewhere that they don’t really know what to do with.

And until now if they were going to put solar on that land there was not going to be  a way to monetize any tax benefits they were gonna have to. They would put up the money and then hopefully see all the benefit back with the electric savings and SRECs. Now if you’re a municipal entity or you are a state entity, you can now put solar and get a direct payment back the following year, and the fact that we’re talking about not just 501 tax exempt, nonprofit charitable institutions, but also state and municipal entities.

We’re going to see the development of solar in two areas that have otherwise struggled to get solar. Prior to the inflation reduction Act, solar was really happening for a lot of residential homeowners. It was really happening for a lot of commercial businesses, and there were a lot of ways to get the tax benefits and to make solar affordable.Now we’re going to see public housing going solar, we’re going to see churches going solar. We’re going to see your local nonprofits, your food banks. You’re gonna see all sorts of borough halls and municipal entities going solar because these entities have already wanted to go solar. They’ve been beating our doors down for years and we’ve shown them economic proposals that just don’t add up.

Now, with the Inflation Reduction Act and with the Direct Pay and these other adders we’ve talked about, the financials are just really spectacular and it’s a fantastic time to look into going solar.

Solar States & Non-Profits

We install solar systems and battery backup systems on non-profits, municipal entities, homes, and businesses within a 2-hour drive of the City of Philadelphia. As a certified B-corporation, we’re committed to both educating and installing. That’s why we partner with several Philadelphia-based non-profits, including Philadelphia OIC, YouthBuild PHL, and PowerCorps PHL, to train inner-city Philadelphians on how to become solar installers. We believe in providing opportunities for career growth and advancement for our underserved communities, and we’re thrilled that many of our trainees have gone on to become solar installers, lead installers, permitting officers, salespeople, operations staff, master electricians, and even business owners.

We don’t just install solar systems, we also offer maintenance packages and service systems for solar systems that we didn’t install. Our commitment to education and service is what sets us apart.

While the details of the Inflation Reduction Act are still being ironed out as of April 20, 2023 (date of this writing), we invite you to contact us to discuss the latest developments.

At Solar States, we’re excited to be at the forefront of creating a cleaner, more sustainable future, and we’d love for you to join us on this journey.