How Can NGOs Access Valuable Federal Solar Tax Credits?

Non-governmental organizations (NGOs), which are nonprofit entities that operate independently of any government, aren’t able to directly utilize federal tax credits available for solar, says Chris Lord, instructor of HeatSpring’s Solar Finance Masters Series and other courses.

Here’s the problem: By definition, NGOS, because they are non-profits, can’t access federal tax credits, he says. That’s a challenge when more than 50 percent of the capital costs of a distributed energy system can be funded by credits. Those incentives can ensure the systems are competitive with the price of local electricity.

These Three Tax Incentives aren’t Available to NGOs

“For good or bad, the federal government implements much of its energy policy by tweaking the tax code to incentivize energy investments consistent with its policy goal,” says Lord. “So, for distributed solar installations on roofs, parking lots or other property owned by NGOs, the typical federal incentives–an Investment Tax Credit (ITC), 5-year MACRS Depreciation and (most recently) 100% bonus depreciation–are simply not available.”

The ITC is a 30 percent credit on residential and commercial solar systems. Under the Modified Accelerated Cost Recovery System (MACRS), the capital costs of property are recovered over a 5-year period. And the US Congress, in its 2018 tax legislation, doubled the amount of bonus depreciation that can be claimed on commercial solar projects.

All these incentives can be a big boost to solar projects, and many people would consider a capital lease as a possible solution for NGOs, says Lord.

Why the Capital Lease Option Won’t Work

“In a capital lease, an owner of the solar system leases the solar system to the NGO for an extended term, at the end of which the NGO can acquire the system for a (typically nominal) fixed purchase price based on the lease payments and original price of the system,” he says.

However, the capital lease doesn’t work when the lessee doesn’t pay taxes. These non-tax-paying entities include municipalities, state governments or NGOs.

“Here is why: under a capital lease, the owner of the solar system is considered to be the NGO – not the lessor,” explains Lord. And that owner doesn’t pay taxes.

However, NGOs can still access the benefits of the credits with a Solar Power Purchase Agreement  (SPPA), which is comparatively straightforward and simple, he says. Under this arrangement, the NGO is not considered the owner, for tax purposes, but can benefit from the tax incentives.

How A Power Purchase Agreement Solves the Problem

The solar system owner enters a SPPA with the NGO under which the owner sells all of the electricity generated by the solar system to the NGO, which is the power-purchase customer.

The SPPA’s term runs at least 15 years but more typically 20 or 25 years. The SPPA provides for the sale of electricity to the NGO at a fixed price per kilowatt-hour, although sometimes that fixed price escalates by an agreed-upon rate each year over the term, Lord explains.

“The NGO customer does have the right to buy out the system–sometimes at a specified point in time during the term,” Lord explains. The buyout would be at the end of the term for a fair market value determined at the time of the buyout.

“Because ‘fair market value’ can vary considerably depending on a wide variety of factors, the IRS sees that formula as vesting the risk of ownership in the owner, not the customer, and for that reason the owner–not the NGO– is also considered the owner for tax purposes.”

The owner can offer the NGO lower prices based on the tax credits.

That’s good news for all the NGOs out there seeking to boost the sustainability of their organizations by purchasing solar.