How Houses of Worship and Nonprofits can still Receive the Federal Solar Tax Credit through Direct Payment in 2026
Rising electricity prices can be especially painful for houses of worship and nonprofit organizations because they operate on fixed, donation-based budgets. This is especially true in California where energy costs continue to rise. Utilities such as PG&E and SCE have significantly increased rates to pay for infrastructure upgrades, wildfire mitigation, and grid modernization.
Solar energy may be the solution. A solar energy system, especially one with battery backup, makes it possible for nonprofits to stabilize long-term energy costs while reducing reliance on the grid. Historically, nonprofits were not able to cash in on federal tax incentives because they don’t pay federal income taxes. That all changed, however, with the Inflation Reduction Act, which created the Direct Pay (Elective Pay) Program. This program allows houses of worship and nonprofits to receive the value of certain clean-energy tax credits as a cash payment from the IRS to help make solar financially viable.
Clean-energy tax credits are federal tax liability reductions that individuals and businesses can receive when they install, invest in, or produce renewable energy technologies. Houses of worship and other eligible nonprofit organizations don’t pay federal income tax, so the IRS will give these organizations the value of certain clean-energy tax credits instead of applying them against tax liability in accordance with Section 6417 of the Internal Revenue Code. This is called Direct Pay or Elective Pay. The program was introduced through the Inflation Reduction Act of 2022 to encourage nonprofit organizations to adopt clean energy technologies.
Solar energy systems that are eligible under the Investment Tax Credit (ITC) (pre-2025) and Clean Electricity Investment Tax Credit (2025 onwards) qualify for a base reimbursement that’s equal to about 30% of the total project. Potential bonus incentives make it possible to increase the total incentive in some cases. Rather than a tax refund, Direct Pay converts the credit into a cash reimbursement after installation to make solar installations less expensive for tax-exempt houses of worship and nonprofits. Previously, nonprofits relied on complicated tax equity financing structures to monetize energy tax credits. Direct Pay simplifies the process.
To receive Direct Pay, the nonprofit must qualify under Section 501(a) of the Internal Revenue Code. Most houses of worship and charitable nonprofits meet the eligibility requirements. They operate as 501(c)(3) organizations, which fall under the broader 501(a) exemption category. Several types of organizations are eligible, including nonprofits, houses of worship, state and local governments, tribal governments, and rural electric cooperatives.
In order to receive the direct payment, the nonprofit must own the solar power system. Projects that are structured under a Power Purchase Agreement (PPA) do not normally qualify because the third-party owner of the system claims the tax credit.
The organization must register the clean-energy project with the IRS before filing for the credit and receive a registration number. This registration number must be included when filing for the Direct Pay incentive.
Some projects, located in areas that are tied to fossil fuel or energy production, may qualify for additional incentives. Energy Community Bonus eligibility is based on federal maps and data that track past fossil fuel employment or the presence of retired coal plants.
Some projects are eligible for additional incentives if they serve low-income communities or are located on qualified low-income property. These credits are not automatically applied. They require a separate federal allocation process.
To claim the direct payment, nonprofits typically file Form 990-T with Form 3468 (investment credit), along with any other applicable credit documentation. Once the project is complete and the documentation has been correctly filed, the IRS issues payment equal to the value of the credit.
Here is a simple sequence of steps to receive Direct Pay, plus the key documents to retain.
Before starting your solar power installation project, confirm Direct Pay eligibility. Your house of worship or nonprofit must be a registered 501(c)(3) and it must be tax-exempt under IRC Section 501(a). The organization must own the solar power system. The project is ineligible if it’s leased under a PPA agreement.
Step 1: Complete IRS pre-filing registration
Start by creating an IRS Energy Credits Online Account and register the project with the IRS. This step is not complete until you have received a project registration number.
Step 2: Verify potential bonus eligibility
Use federal maps to determine whether the project qualifies for an Energy Community Bonus incentive. If eligible, apply for the Clean Electricity Low-Income Communities Bonus Credit Amount Program allocation through the Department of Energy.
Step 3: Complete installation
The project must be fully installed and operational before the incentive payment can be received.
Step 4: File for Direct Pay
Submit Form 990-T with Form 3468 along with your project registration number. Remember to include any additional bonus credit documentation with your submission.
Maintain records for at least five years
There are several documents that you should hold onto for at least five years, just in case the IRS needs to see them:
The IRS clean-energy incentive application process can be quite involved. It’s easy to miss a step or make a simple mistake. There are a few common errors that should be avoided while applying for a clean-energy Direct Pay incentive for your house of worship or nonprofit.
Skipping IRS pre-filing registration
Remember to register your project with the IRS before getting started. Late registration can delay or even invalidate the claim.
Assuming the low-income bonus is automatic
The low-income bonus credit program requires a separate, often competitive federal allocation process. The credits are not automatically applied. In fact, many eligible projects don’t receive the credit.
Forgetting to file Form 990-T
Even nonprofit organizations that don't normally file federal tax returns must submit the appropriate tax forms to receive the direct payment.
Misunderstanding grant interactions
The Direct Pay incentive is based on how much the house of worship or nonprofit actually pays for the solar project. If another organization covers part of the cost with a grant, the amount eligible for the credit may be reduced or eliminated entirely.
Incorrect ownership structure
If a third party owns the solar system, that party, not the nonprofit, receives the tax credit.
Direct Pay is the best solution when an organization is able to shoulder the upfront cost of purchasing a solar power system (via cash or loan) and prefers ownership so that it can capture the long-term benefits of the tax credit. When the organization owns the equipment, it can receive the full credit value as a payment, while enjoying reduced electricity costs and protection from rising energy costs.
Power Purchase Agreements make more sense for organizations that want to avoid upfront costs. This arrangement allows the third-party owner of the system to receive the tax credit while the nonprofit buys the energy collected by the solar system at a fixed rate.
Federal clean-energy incentive programs have made solar power systems more feasible for nonprofits that are trying to offset the rising cost of electricity. The Direct Pay programs make it possible for nonprofits to benefit from tax incentives that were only available to businesses that paid federal income tax. Eligibility and documentation can be quite complicated, and seemingly insignificant mistakes can be expensive, leading to delays or even ineligibility.
Are you trying to determine whether Direct Pay or PPA is a good fit for your house of worship or nonprofit organization? Schedule a consultation with the experienced staff at Citadel Roofing & Solar today.