Governments, get your refundable tax credits here
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COMMENTARY | The Inflation Reduction Act includes green tax credits that state and local agencies can use on clean energy vehicles, infrastructure and renewable energy projects.
From deficit and pollution reduction to creating a fairer tax code, the stated goals of the climate law, the Inflation Reduction Act, have been well-publicized. With this far-reaching piece of legislation also comes a slew of financial operations, tweaks and opportunities that organizations can embrace. Arguably the most notable—yet often overlooked—feature of the IRA is what it means for state and local governments … and their tax returns.
Until the implementation of the IRA, states and localities generally had not had the distinct pleasure of filing tax returns. However, under the IRA, certain costs that many governments regularly incur as they transition from traditional to “greener” infrastructure qualify for refundable tax credits if they file a tax return.
With that in mind, here are a few of the key opportunities that state and local governments should look for ahead of next year’s filing deadline, as well as best practices for taking advantage of them.
Tax-Credit Eligible Government Expenses
One of the most notable financial benefits made available to local and state governments through the IRA is the creation of green tax credits that can cover:
● Clean energy vehicles. Passenger vehicles, buses, ambulances and other vehicles used on public streets, roads and highways are eligible for credits of $7,500 for smaller vehicles and up to $40,000 for larger vehicles.
● Alternative fuel vehicle refueling property. This credit is for properties located in low-income and non-urban areas. Qualified fuels include electricity, ethanol, natural gas, hydrogen and biodiesel. The base credit is 6% of the project basis. However, the credit can increase to 30% with a project labor agreement, or PLA, that pays prevailing wages and establishes an eligible apprenticeship program for junior laborers.
● Renewable energy projects. Fuel cell, geothermal, small wind, energy storage, biogas and combined heat and power properties are eligible for a 6% tax credit, which can be increased to 30% with a PLA that pays prevailing wages and includes an apprenticeship program.
● Public utilities. Utilities that generate or invest in renewable energy technology may be eligible for tax credits based on the energy produced.
● Low-income communities bonus credit. Projects under 2, 3, and 4 above are eligible for a bonus of up to 20% if they are in a HUD-designated qualified census tract.
Claiming and Receiving Green Tax Credits
Despite the numerous credits that are available, claiming these credits—particularly for the first time, which many state and local governments will be attempting—can be a bit of a challenge. However, there are several best practices that can help government filers minimize headaches and ensure they receive the maximum return:
● Pre-file with the IRS. Governments that have not previously filed a tax return must register each project with the IRS. To do so, those managing the refund process will need an ID.me registration, which one of the government’s grant managers likely already has. The IRS will assign filers a registration number for each project, which they will use when they file the return.
● Determine the tax year. This may be nuanced, depending on a government’s volume of credit-eligible expenditures from Jan. 1, 2023, until the end of the fiscal year. In some cases, it may make sense to send in the initial return as a calendar-year filing. In other cases, submitting as a fiscal-year filer will make more sense. Agencies should consult with an advisor to assist in this determination.
● Determine the filing deadline. This is 4.5 months after the tax year ends, with an automatic 6-month extension in the initial filing year.
The IRA has a host of financial opportunities and nuances that state and local agencies have had to navigate. However, with governments worldwide spending a whopping $45 billion on green vehicles in 2022 alone, not taking advantage of the new green tax credits would be a significant missed opportunity. By following these few best practices, government leaders can recover a huge amount of eligible costs incurred since January 1, 2023, and for the next 10 years.
Jack Reagan has over 30 years of experience as an auditor and consultant for state and local governments, local school districts, federal government entities, and not-for-profit organizations.
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