The Inflation Reduction Act’s direct pay program aims to jumpstart clean energy in the nonprofit and governmental sectors with a straightforward process allowing entities to receive a direct payment from the IRS equivalent to the tax credit a for-profit organization would receive. Before direct pay, nonprofits, municipalities and other tax-exempt entities seeking clean energy incentives had to involve third parties to purchase and install their projects and enter into power purchase agreements to receive energy savings and tax incentives.
While the door is now open for nonprofits, municipalities, and tribes to own their clean energy projects and receive incentives directly from the IRS (without third parties involved), there are still obstacles. Clean energy incentives are tied to tax-filing timelines, making it feel like you need a time machine to kickstart a project. If your nonprofit can only afford the project after completion when the tax incentives and rebates have been disbursed, how are you supposed to get the money to begin?
The challenge with direct pay
Considerable time can pass between when you start your project, pay contractors and suppliers, complete your project, file the necessary tax form, and receive your direct pay cash payment from the IRS. How can nonprofits with tight margins and governments stewarding taxpayer dollars afford to fund the project at the outset?
These questions are especially pressing when you factor in the project’s time frame. Many projects take months or even years to complete. For example, if your nonprofit plans a solar project in 2023, and installs and activates it in 2024, you might not receive a direct pay refund until May 2025 or later, depending on when the organization files and any extensions needed.
And as much as your organization wants to jump into the clean energy space, it might need to reach deep into its pocket (or members’ pockets) to pay upfront for materials, labor, and other fees. For a $100,000 project, having to wait for a 30% tax credit or $30,000 to fund the project can make the difference in deciding whether to pursue a project or stop trying.
Michigan Saves can help bridge the gap
As experts at unlocking financial incentives and affordable financing options for clean energy improvements, Michigan Saves can help. With our Tax Credit Bridge Financing, we will walk your nonprofit through the application process and provide you with short-term financing to cover the estimated investment tax credit direct payment for eligible upgrades. You can afford the up-front costs related to your clean energy project and benefit from the IRA’s direct pay once the project is complete. Your organization will pay back the financing once your credit payment is received from the IRS.
In its pilot stage, this bridge financing is available to nonprofit, municipal, and tribal entities investing in solar energy and battery storage projects. The program will expand soon to include other energy projects eligible under the IRA.
You can’t afford to not do this
Let’s say your nonprofit wants to install a solar array project (less than one megawatt in nameplate capacity) and battery storage for a building it owns. These projects are eligible for the basic 30% tax credit under the IRA’s direct pay program.
If your building is in a low-income community, your project is eligible for an additional 20% credit. If your building is in an energy community, it’s eligible for another 10%. Other IRA tax credits are also available. Organizations are also allowed to use federal or state grant funding on the same project.
In total, this means the final cost of a $100,000 solar project could cost half of the price it would without incentives. With Michigan Saves bridge financing prefunding the estimated tax credit, your organization will need to finance less or pay fewer upfront costs with minimal fees.
How much can we borrow?
Michigan Saves bridge financing can prefund $20,000 to $250,000 of an estimated tax credit for eligible projects, allowing the organization to pay up-front costs with minimal fees.
A Michigan Saves bridge loan has a 3.99% interest rate, a 1% origination fee, and a $250 documentation fee. The full loan is due once your nonprofit receives the direct pay credits with a maximum term of 24 months. Before it received the direct pay tax credits, your nonprofit would only be responsible for interest-only payments.
We’re just getting started
In addition to the financial benefits, applying for Michigan Saves bridge financing helps your nonprofit prepare for the prefiling and filing of the tax credit forms because many of the same forms the IRS will request are needed. In addition, working with Michigan Saves links you to our contractors, who are vetted and knowledgeable about clean energy projects to help ensure your project is completed successfully.
For nonprofits and governmental entities, the IRA’s direct pay program combined with Michigan Saves bridge financing makes clean energy projects affordable and possible, helping all organizations in Michigan move toward the state’s goal of net zero carbon emissions by 2050.
