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Clean Energy Tax Credits for Tribal Governments

The Inflation Reduction Act passed in August 2022 marked a significant turning point for American Indian tribes, as it established unprecedented access to clean energy tax credits and other tax incentives. This Act, also known as the tax-and-climate law, overcomes the hurdle of tax-exempt status that had historically excluded tribal communities from such benefits. Now, millions of dollars are available to tribes to bolster their clean energy projects, aiding in the fight against climate change and offsetting project costs. The law not only encompasses direct tax credits but also introduces a ‘direct pay’ option, potentially covering up to 70% of a project’s costs and incentivizing the development of renewable energy on tribal lands, which represent an untapped 6.5% of total US utility-scale renewable energy technical potential.

Introduction: Paving the Path to Clean Energy

American Indian tribes stand on the precipice of a new era, empowered to make their unique contributions to the fight against climate change through the recent expansion of clean energy tax credits. The “Inflation Reduction Act,” colloquially referred to as the tax-and-climate law, passed in August 2022, has blown open the doors to tax incentives for tribal communities. These groups, previously barred due to their tax-exempt status, can now access the financial fuel they need to propel their clean energy projects forward.

Leveling the Playing Field: A New Dawn for Tax Credits

Imagine being a player in a high-stakes game, yet the rules never favor you. This has been the reality for tribal governments seeking to harness their renewable energy potential. For years, the tax-exempt nature of these tribes barred them from harnessing tax credits, hampering their progress in implementing sustainable energy projects.

The tax-and-climate law’s new provision, however, is changing the game. It extends the reach of refundable payments, previously only given as tax credits, to many tax-exempt organizations and government entities like tribal governments.

In the words of Susan Masten, Interim Executive Director of the Native American Finance Officers Association, “Having access to tax credits puts us on an equal playing field with corporations and states.”

Such a move recognizes the unique situation of tribal lands, which comprise 5.8% of US lands and represent an untapped 6.5% of total US utility-scale renewable energy technical potential, according to a 2018 report from the National Renewable Energy Laboratory. This access to tax credits could dramatically shift the profitability of renewable energy projects on these lands.

The New Age of Direct Pay

One of the most impactful elements of this legislative overhaul is the introduction of a ‘direct pay’ option. This provision is a lifeline for tribal governments looking to diversify their revenue streams. Rather than relying on the third-party ownership model that historically siphoned profits out of the community, tribes can now directly own projects and receive cash equivalent to the tax credit value—this could cover up to 70% of the project’s costs.

The direct pay system is transformative for two reasons. Firstly, it incentivizes lenders who might have been hesitant to engage with tribal governments due to their unique operating styles. With direct pay, these governments become a safer investment risk. Secondly, it provides tribal communities with the ability to self-fund clean energy projects, promoting self-sustainability and helping to combat energy poverty.

The Role of the IRS and Treasury: Clarifying the Path Forward

With such seismic shifts in the clean energy financial landscape, guidance from the IRS and Treasury is crucial to ensure a smooth transition for tribal communities. While many tribes wait for more explicit instruction on leveraging these new opportunities, there are some key points to consider based on the already-released guidance.

Under the proposed rules, direct pay is extended to tribal governments, their political subdivisions, agencies, and instrumentalities, meaning groups controlled by the tribal government for a public purpose. This inclusion is critical, especially for tribes with their own utilities or housing authorities.

Additionally, while all grants are non-taxable for tribal governments, the cost basis of a project won’t be reduced by the amount of the grant. However, mixed partnerships—where some partners are eligible for direct pay and others aren’t—can’t claim direct pay on behalf of the partners. This restriction may necessitate new strategic approaches for project planning and financing.

When direct pay isn’t feasible, tribal governments have another option—selling the tax credits to an unrelated party through a process known as transferability. This path will inevitably be more complex and may decrease the credit’s value. Furthermore, entities seeking to claim direct pay will have to file a Form 990-T, a form typically used by charities. This requirement is a departure from the norm for many state, local, and tribal governments that typically don’t file tax returns. As such, the advice of experts like Pilar Thomas, a partner at Quarles & Brady LLP and former deputy director for the Office of Indian Energy and Policy Programs, will be invaluable. Thomas suggests getting a tax professional “right now.”

Conclusion: Stepping into the Future of Clean Energy

The tax-and-climate law marks a historic shift in the clean energy tax credits landscape for American Indian tribes. By leveling the playing field and introducing innovative financing mechanisms like the direct pay option, it has provided a potential catalyst for renewable energy projects on tribal lands.

While these changes present exciting opportunities, they also bring challenges, and it’s clear that a detailed understanding of the new law and its implications is crucial for tribal governments to effectively leverage these opportunities. As tribes navigate these novel waters, the journey will undoubtedly be complex and challenging. But with careful navigation, informed decision-making, and strategic planning, the path ahead could lead to a more sustainable, prosperous future.

If you have questions or need help with this or any other tax matter, contact The Tax Defenders TODAY at 312-345-5440.

This issue was originally reported by Erin Slowey of Bloomberg.