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What you need to know about the IRA: Direct Pay

What is direct pay?

With a mix of federal funding and tax credits, the Inflation Reduction Act includes a new mechanism called direct pay for tax-exempt entities — local governments, tribal nations, nonprofits, faith communities, and cooperative and municipal utilities — to take advantage of many of the new clean energy tax incentives included in the law.

What is eligible for direct pay? 

There are two ways direct pay will be most helpful for tax-exempt entities: electric vehicles and renewable energy systems.

Electric Vehicles

The Inflation Reduction Act creates a new credit for qualified commercial vehicles whereby tax-exempt entities will receive a payment of up to 30% of the cost of a qualified vehicle.

There is a payment limit:

  • $7,500 for vehicles with a gross weight of fewer than 14,000 pounds (fleet cars, heavy-duty trucks).
  • $40,000 limit for vehicles at or above that weight (school buses, utility bucket trucks, fire trucks).

Renewable Energy Systems

For renewable energy projects, the direct pay option also applies to the Production Tax Credit and the Investment Tax Credit, both of which are primary investment credits used to help finance renewable energy projects.

Tax-exempt entities that finance a clean energy capital project, such as a solar array, are eligible to receive up to 30% of the cost of the project paid for from the Department of the Treasury.

Why is direct pay important?

Historically, only taxpaying entities were able to take advantage of renewable energy tax incentives, but this legislation levels the playing field between taxpaying and non-taxpaying entities and opens the door for everyone to access these incentives.

Additionally, it incentivizes ownership from day one, instead of utilizing Power Purchase Agreements.

Want to know more?

Email us! Send us your questions or resources you find useful. 

Please note: We're sharing resources to assist Minnesotans who are seeking information about federal funding opportunities. These resources are based on preliminary information released by the federal government. Program information may change as more guidance is provided by federal and state governments. For specific information on federal funding, please visit the relevant U.S. Government websites.


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