The Inflation Reduction Act became law in 2022, and though its name might not suggest it, the law actually includes both new tax breaks for nonprofit organizations and cash refunds for certain tax breaks.
Until now, tax breaks didn’t affect tax-exempt organizations, so you may not have paid close attention to the new ones introduced in the Inflation Reduction Act. As such, before your next nonprofit audit, it would be wise to have a look at some of the bill’s highlights and the ways in which it is fostering positive change for many nonprofits.
Tax-Exempt Organizations Now Included
Prior to the Inflation Reduction Act, some homeowners and business owners were entitled to a building tax deduction if they had energy-efficient buildings constructed by “qualified designers.” Most nonprofits couldn’t claim that deduction, but things have changed.
Most nonprofits will now be able to save on new energy-efficient buildings. Still, it’s important to understand that you can’t claim the deduction if you’re renovating an existing building. The building must be the end result of a new construction project.
Understanding the Allocation Process
Like most tax credits, the one provided by the Inflation Reduction Act can be somewhat complicated. Once you’ve determined the total tax credit you qualify for, you can divide it between the designers involved in the process or only give it to one.
A “designer” is often one of the following:
- Architect
- Contractor
- Engineer
- Energy service provider
- Environmental consultant
As for how to determine the total deduction you qualify for, you’ll first need a qualified person (usually a contractor or engineer) to verify that your project is energy-efficient enough to be eligible for the credit. Then, to make things official, you will need to sign an “allocation letter” confirming the cost of the project and stating how much of the credit you’re allocating to each designer.
Cash Reimbursements for Tax Credits
Cash reimbursements are among the most valuable provisions of the new law. In the past, tax-exempt organizations couldn’t benefit from tax credits. They couldn’t receive the cash value of the credits, and there were no tax payments to apply them to.
Thankfully, through the Inflation Reduction Act, most nonprofits are now able to receive cash refunds for applicable tax credits through something called the “direct pay provision.”
The provision doesn’t apply to every single tax credit, so it’s wise to make sure a given credit is eligible before you plan on claiming it. Still, it does apply to many of the tax credits related to energy efficiency, including the following:
- Alternative Fuel Vehicle Refueling Property Credit
- Investment Tax Credit
- Advanced Manufacturing Production Credit
- Production Tax Credit
- Commercial Clean Vehicle Credit
Understand, however, that you don’t immediately get a cash refund for these credits. The IRS will issue them after you file your taxes for the relevant year.
Professional Guidance Recommended
If you run a nonprofit, you’ll be happy to see that your organization may actually qualify for more tax breaks than before. But tax law can be tricky to navigate, and you don’t want to risk making a costly mistake. Therefore, before you plan on taking advantage of one of these new tax breaks, it’s a good idea to get in touch with a tax professional who can offer some guidance.
A New Era for Nonprofits
Most nonprofits aren’t sitting on major cash reserves, so the changes introduced by the Inflation Reduction Act can make a major difference in an organization’s finances. Of course, that doesn’t mean you should start spending on every energy-efficient technology you can find. When you schedule your next nonprofit audit, it’s worth taking the time to discuss the Inflation Reduction Act and how it may affect your organization.
If you don’t already have a nonprofit audit services provider, now is the perfect time to find one. At Ernst Wintter & Associates LLP, we have extensive experience with California nonprofit audit services. Contact us today to see what we may be able to do for you!