Not-for-profit organizations have been part of the backbone of ensuring a sustainable and equitable society. Throughout this country’s history, federal programs have been a catalyst providing pathways that support not-for-profit organizations’ ability to accelerate and innovate when it comes to creating programs, opportunities, and investments related to equity and sustainability. One such initiative is the low-income housing tax credit (LIHTC) program where over 3.5 million housing units have been placed into service since its creation in 1986. Not-for-profit organizations have been instrumental in the success and importance of social equity programs such as the LIHTC program.

Inflation Reduction Act (IRA)

President Biden signed the Inflation Reduction Act (IRA) into law on Aug. 16, 2022, marking the most significant action Congress has taken on clean energy and climate change in the nation’s history. There were two significant opportunities created from the IRA that give not-for-profit organizations yet another opportunity to play that crucial role in ensuring a fair and equitable society. The IRA not only extended and enhanced existing tax credits, but it also created space for those that otherwise could not originally benefit from traditional tax incentives. 

Direct pay

The first such opportunity is Section 6417 of the IRA – Elective Payment of Applicable Credits, also known as direct pay. Direct pay allows for certain credits to be refundable for applicable entities and eligible taxpayers.

Who are considered applicable entities?

• Tax-exempt organizations
• U.S. territories, states, local governments, and their agencies
• Indian Tribal Governments
• Rural Electric Cooperatives
• The Tennessee Valley Authority
• Alaska Native Corporations

The IRA’s direct pay provisions allow tax-exempt and governmental entities to receive various clean energy tax credits, including the major Investment and Production Tax Credits, as well as tax credits for electric vehicles and charging stations. By providing an avenue for local governments (and other tax-exempt entities) to invest in clean energy, they are deploying more clean energy into local communities and advancing environmental justice. Similarly, not-for-profit entities can afford to install clean energy, which can help them reduce their own energy use and save money to spend more resources on their mission.

Following are examples of how not-for-profit organizations are strategizing around taking advantage of direct pay:

• Exempt entities that own or are a partner in Section 42 affordable housing projects looking to see if they can own assets used on the housing project and capture the direct pay.
• A public university installing a micro-gird with CHP, Storage, and solar looking to claim direct pay.
• Not-for-profit serving low-and-moderate-income communities looking to direct pay to provide energy to low-income schools and families in the community the school serves.

Greenhouse Gas Reduction Fund program

The second provision of the IRA presenting unique opportunities for not-for-profit organizations is the Greenhouse Gas Reduction Fund (GGRF) program. This $27 billion program, which is being authorized through the Environmental Protection Agency, is particularly focused on investment in decarbonization, greenhouse gas reduction, and zero-emissions technologies, in low-income and disadvantaged communities. The GGRF program is allocated across three components:

• The $14 billion National Clean Investment Fund (NCIF), created to spur collaboration with private capital providers to fund distributed energy generation and storage, net-zero-emissions buildings, and zero-emissions transportation. Funding has been awarded to Climate United Fund, the Coalition for Green Capital, and Power Forward Communities.
• The $6 billion Clean Communities Investment Accelerator (CCIA), designed to rapidly build up the financial capacity of community lenders in low-income areas. Awards have been issued to Opportunity Finance Network, Inclusiv, Justice Climate Fund, Appalachian Community Capital, and Native CDFI Network.
• The $7 billion Solar for All (SFA) program, intended to increase funding and access to solar energy for residential and community solar projects in underserved locales by funding residential and community solar and energy storage projects. Sixty awards have been issued for this program.

As it relates to not-for-profit organizations, a key vehicle by which these program components will be administered is through community development financial institutions (CDFIs). CDFI organizations obtain this designation from the CDFI Fund, a part of the U.S. Department of Treasury. Since its inception in 1994, the CDFI Fund, primarily through designated CDFI organizations, has provided more than $5.1 billion through its award programs and $66 billion in tax credits via the New Markets Tax Credit program and has guaranteed more than $1.8 billion through its CDFI Bond Guarantee Program. As of September, there were over 1,400 designated CDFIs across the United States, including approximately 50 with headquarters in Washington, D.C., Maryland, and Virginia. Many not-for-profit organizations are designated CDFIs. The profile of CDFI organizations was elevated to unprecedented heights during the COVID-19 pandemic when both the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the American Rescue Plan Act (ARPA) contained specific allocations of funding for the CDFI Fund to provide CDFI organizations. 

The critical importance CDFIs play when it comes to investment in disadvantaged communities continued with the GGRF when CDFI organizations, particularly loan funds (which are primarily not-for-profits) and credit unions were identified as one of only a few entity types that would be eligible to apply for GGRF allocations. 

On Aug. 16, the EPA obligated the full $27 billion of awards it made to the multiple recipients of its GGRF program. Subsequent to the obligation, there has been a significant acceleration in the finalization of GGRF strategies with receipt of funding to occur through the remainder of this year and program deployment to begin in earnest in 2025. 

Challenges

While the direct pay provision and the GGRF program present unprecedented opportunities for not-for-profit organizations, they are not without their challenges when it comes to establishing qualification and compliance. 

For example, with direct pay, there are limits on claims for projects funded by grants and forgivable loans. For GGRF, with it being a federal financial assistance program, organizations must be aware of and effectively design and implement sufficient infrastructure to ensure compliance with federal regulations, especially when it comes to oversight of other organizations who may be receiving subawards from the GGRF program. Understanding and navigating the complexities of both programs will be critical to their success.

Conclusion

The IRA’s possibilities for not-for-profit organizations are endless. Whether it’s allowing for the ability to take advantage of incentive programs that previously weren’t possible such as direct pay or continuing to play a critical role in the transition to clean energy for disadvantaged communities, not-for-profit organizations have been and continue to be a critical player in establishing an equitable and sustainable future. 

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