Certain measures in new law could affect or benefit exempt organizations

Items of interest for exempt organizations in the “Inflation Reduction Act of 2022”

Items of interest for exempt organizations in the “Inflation Reduction Act of 2022”

President Biden on August 16, 2022, signed into law H.R. 5376 (commonly referred to as the “Inflation Reduction Act of 2022”)—the budget reconciliation legislation that includes significant law changes related to tax, climate change, energy, and health care.

The bill was passed by the Senate on August 7, 2022, and by the House of Representatives on August 12, 2022.

Read a KPMG report Analysis and observations: Tax law changes in the “Inflation Reduction Act of 2022” [PDF 1.5 MB] (73 pages)

Items of interest for exempt organizations

The legislation does not include provisions specifically focused on charities or charitable giving. There are certain measures, however, that could in some ways affect or benefit exempt organizations.

For instance, one provision concerns a book minimum tax on corporations with average annual adjusted financial statement income of more than $1 billion. For tax-exempt corporations, only unrelated business income will be taken into account for purposes of the $1 billion threshold.

Other provisions concern clean energy tax credits—measures that could benefit exempt organizations making investments in clean energy technologies.

For instance, the new law expands access to various energy tax credits, including by making them available to certain tax-exempt and governmental entities—specifically by providing a “direct pay” election under which these organizations can receive a cash refund for the amount of the credit determined. Under prior law, these tax credits had certain limitations for projects owned by exempt organizations. 

For purposes of many of these provisions, organizations eligible for the direct pay tax credits include: (1) any organization exempt from the Federal income tax imposed by subtitle A of the Code; (2) any state or political subdivision thereof; (3) the Tennessee Valley Authority; (4) an Indian tribal government; (5) any Alaska Native Corporation; or (6) a rural electric cooperative.

KPMG observation

Organizations potentially eligible for these credits include charitable organizations described in section 501(c)(3)—including universities, hospitals, private foundations and others investing in clean energy technology, whether for their own use or as a program-related investment. However, many public institutions, including universities and hospitals, are organized as instrumentalities of a state or political subdivision, which the statute does not specifically mention in this regard. Therefore, until guidance is provided by the IRS and Treasury Department, it is unclear whether all public institutions will be able to take advantage of these credits. 

The types of tax incentives now available to exempt organizations include:

  • Production tax credits and investment tax credits for wind, solar, geothermal, combined heat and power and other technologies
  • Investment tax credits for electric charging stations
  • Production tax credits for zero-emissions nuclear power facilities
  • Additional incentives for carbon capture, clean hydrogen, investments in certain manufacturing facilities, certain clean vehicles, and clean fuel production

In addition, the energy efficient building deduction under section 179D has been expanded by the new law to allow not just government entities (including states, political subdivisions and instrumentalities), but also other tax-exempt organizations, to allocate the deduction attributable to buildings owned by such entities to the designer of the property.

For many of these incentives, access to the highest available credit rates is conditioned on projects being constructed using prevailing wage labor and qualified apprentices. Also, there are potential additional credit amounts available for projects located in certain low-income census tracts.

Although another significant feature of the new law is the ability for taxpayers to transfer many of these credits in exchange for cash consideration, the new law prohibits tax-exempt organizations that are eligible for direct pay from transferring the credits. 

KPMG observation

The House of Representatives passed the “Build Back Better Act” in November 2021—a bill that included provisions that would directly affect tax-exempt organizations. Read TaxNewsFlashThe new law does not include those exempt organization proposals.

For more information, contact a tax professional with KPMG’s Washington National Tax practice:

Ruth Madrigal | ruthmadrigal@kpmg.com

Preston Quesenberry | pquesenberry@kpmg.com


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