The IRA’s direct pay option lets tax-exempt groups get back 30% to 70% of their solar costs as cash from the IRS. This matters because these groups, like nonprofits and schools, don’t pay federal income taxes. Normally, they can’t use tax credits. But direct pay changes that by sending them a cash refund instead.
Direct pay turns solar tax credits into real cash — even for groups that owe zero in federal taxes.
The base credit rate under Section 48 is 30% for solar projects. To get that full 30%, projects must meet prevailing wage and apprenticeship rules. Projects under 1 megawatt skip those requirements and still get 30%. Section 48 covers projects that started construction before the end of 2024. After that, a similar program called Section 48E takes over.
Bonus credits can push the return even higher. A project built in an “energy community,” like a former coal town, can reach 40%. Adding domestic content requirements can push the rate to 50% or even 60%. In some cases, the total return can hit 70%. For example, a $10 million solar project in an energy community could bring back $4 million in cash.
To get direct pay, a tax-exempt group must first register with the IRS before filing their tax return. After the solar project is installed, they select the elective payment option on their return. The IRS then processes it and sends a cash payment. It’s a straightforward process, but it does take several months after filing.
Direct pay covers 12 clean energy tax credits under the IRA, not just solar. No federal tax liability is needed to qualify, which is why it’s a big deal for tax-exempt groups. Projects of 1MW or larger capacity that begin construction after 2024 may receive reduced credits if domestic content requirements are not met. Eligible entities include tribal governments, rural electric cooperatives, and municipal utilities, which broadens the reach of direct pay well beyond traditional nonprofits. Organizations pursuing solar can also purchase renewable energy credits to supplement their clean energy claims while direct pay processing is underway.
By comparison, CollectiveSun reportedly offers tax-exempt organizations around 15% of their solar costs through a financing arrangement. That’s roughly half of what the base IRA direct pay rate offers, and far less than what bonus credits can bring.
The credit schedules do change over time. Section 48E starts phasing down in 2033. So the window for the highest returns won’t stay open forever, according to current law.
References
- https://www.mcguirewoods.com/client-resources/alerts/2023/2/inflation-reduction-act-extends-and-modifies-tax-credits-for-solar-projects/
- https://home.treasury.gov/system/files/8861/Direct Pay-IRS ECO-Domestic Content.pdf
- https://www.youtube.com/watch?v=JlQHv9BXCrY
- https://www.energysage.com/solar/solar-tax-credit-explained/
- https://www.eesi.org/papers/view/fact-sheet-direct-pay-for-nonprofits
- https://reimagineappalachia.org/direct-pay-how-to-get-a-tax-return-for-clean-energy-projects/
- https://www.energy.gov/sites/default/files/2024-08/Elective_Pay_Fact_Sheet_Territories_073124.pdf
- https://www.irs.gov/credits-deductions/elective-pay-and-transferability
- https://www.cleanenergyresourceteams.org/what-you-need-know-about-ira-electivedirect-pay
