Inflation Reduction Act (IRA) Tax Credits can fund public school facilities upgrades and reduce school district energy bills.

According to the U.S. Department of Energy (DOE), K-12 school districts spend nearly $8 billion annually on energy costs, the second largest expense after teacher salaries. Aging facilities combined with limited school budgets can result in deferred maintenance of facilities, with current estimates of around $270 billion needed for infrastructure repairs.

The IRA creates a unique opportunity for K-12 public school districts to leverage federal tax credits to help to fund investments in clean energy infrastructure and reduce cost.

Through elective pay, also known as “direct pay,” school districts can claim certain clean energy tax credits and receive funds directly from the IRS for their qualifying projects or investments.  After a school district places eligible property in service, the school district must register its intent to claim a tax credit with the IRS and file a tax return. The IRS would then make a payment in the amount of the credit.

Eligible Entities

Under proposed Treasury regulations, public school districts that are agencies or instrumentalities of state, local, tribal, or territorial governments can benefit from several tax credits.

Eligible Activities

Schools may be able to use tax credits for certain production, investment, equipment-purchase and other activities including but not limited to the following:

• Purchase of electric school buses or other clean energy vehicles.
• Installation of solar panels on a school roof to provide electricity for school buildings.
• Installation of a microgrid – a small network of electricity users – with solar and energy storage to serve facilities during emergencies and grid outages.
• Installation of a central geothermal system to heat campuses or community buildings.
• Installing alternative fuel vehicle refueling property such as charging equipment.

IRA Clean Energy Tax Credits, published by the IRS, provides a list of clean energy activities for which school districts may receive a tax credit.

Tax Credit Amount

The value of the tax credit will depend on project details.  For example, an investment tax credit can increase from 6% to 30% for large projects that meet requirements for paying workers prevailing wages and using registered apprentices for the construction of clean energy project(s).

Bonuses may be available for some types of production and investment tax credits, as well as for low-income communities, and can have a significant impact on project financing and structure.

School districts should carefully review the statute, regulations and guidance and consider consulting a tax professional. 

Next Steps

The Department of the Treasury identifies the following steps toward receiving a tax credit:

• Identify and pursue the qualifying project or activity. Credits are available once a project or property has been placed in service. For example, a school district installing solar panels would complete the installation and start using those panels to generate electricity;
• Using IRS guidance, establish your tax year, which will determine when your tax return is due.  Credits only apply to the taxable year that begins in 2023 and following years;
• Meet the specific eligibility requirements for the requested tax credit and any applicable bonus credits for a given tax year;
• Complete the pre-filing registration with the IRS (information is now available at IRS opens free IRA and CHIPS Pre-filing Registration Tool for organizations to register to monetize clean energy credits | Internal Revenue Service); and
• File Form 990-T by the due date of your tax return (or extended due date) and indicate the credit that the school district will be filing for, along with any other form(s) required for the underlying tax credit. Those without an annual filing requirement will receive an automatic 6-month extension.

School districts can find more comprehensive information about the tax credit process at www.irs.gov/electivepay and can learn more about pre-filing registration with the IRS at Register for elective payment or transfer of credits | Internal Revenue Service (irs.gov).

Payments occur after the tax return is processed (assuming requirements are met). Under the statute, the taxpayer cannot receive the elective payment until the due date of the return, even if the taxpayer files the return before that date.

For further information, go to www.irs.gov/cleanenergy.