Can a Nonprofit Get Direct Pay on a Solar PPA?

Generally, no. A nonprofit or city gets the federal solar credit paid in cash by the IRS through direct pay (the IRS calls it elective pay) only when it owns the system. Under a power purchase agreement the developer owns it and claims the credit. If your organization owns it, you can, as long as the project qualifies and the filing pieces are in place by the deadlines that apply as of September 2026.

We see two misses often, and both are problems someone could have caught early. Sometimes an organization signs a power purchase agreement believing it will collect the federal credit through direct pay. Other times it owns its system outright, turns it on in the fall, and reaches year-end with no registration plan. Both are far easier to handle before the system is turned on.

Can a nonprofit get direct pay on a PPA or lease?

Elective pay under Section 6417 lets “applicable entities” treat certain clean energy credits as a payment from the IRS, even when they owe no tax. That group includes tax-exempt organizations, states and political subdivisions (cities, counties, school districts), tribal governments, Alaska Native Corporations, the Tennessee Valley Authority, and rural electric cooperatives.

Qualifying as an applicable entity is only half of it. IRS guidance says the entity making the election generally has to own the property that produces the credit. You can’t elect direct pay on a credit that was determined for someone else.

Power purchase agreement. A developer owns and runs the system on your roof or land. You buy the electricity it produces at an agreed rate over a long-term contract. Because the developer owns the equipment, the developer has the credit. Any benefit reaches you indirectly, through your rate. Most solar leases work the same way on this point.

Direct ownership. You buy the system, usually through an engineering, procurement, and construction (EPC) contract, and you own it when it’s placed in service. If everything else lines up, your organization claims the credit and receives the payment.

Neither is automatically better. A PPA moves construction, maintenance, and performance risk to the developer. Ownership asks more of you in cash and compliance, but the credit and long-term savings stay with you.

If a proposal describes a PPA and also says you’ll receive direct pay, ask for that explanation in writing. A later buyout option doesn’t change the answer, because an investment credit is earned in the year the system is placed in service, by whoever owns it then.

What an owned solar project needs before the credit can be claimed

For an owned system, four core steps need to line up, and a few other rules can shrink or deny the credit along the way. Solar that began construction after 2024 falls under the Section 48E clean electricity investment credit. A system that began construction earlier may still be claimed under Section 48.

Construction start and the deadline. Under the 2025 reconciliation law (P.L. 119-21), a wind or solar project that began construction after July 4, 2026 gets no 48E credit unless it is placed in service by December 31, 2027. That start date has already passed, so for a contract signed now the question is whether the system will be in service by the end of 2027.

Treasury’s Notice 2025-42 had narrowed how wind and solar projects could show that construction began. On June 6, 2026, a federal district court vacated that notice in Oregon Environmental Council v. IRS, which puts back the older IRS tests: significant physical work, or for many projects, paying or incurring at least 5% of total cost. The ruling could still be challenged. A project that shows significant physical work by July 4, 2026 is on firmer ground than one that relies only on the 5% test. Solar systems of 1.5 MW (AC) or less could use the 5% test under either approach.

If your developer says construction began by July 4, 2026, ask to see the file, ask which test the date relies on, and ask how the project will show continuous progress toward completion. Placing the system in service within four calendar years after the year construction began generally satisfies that requirement. If construction didn’t start by July 4, 2026, the system needs to be in service by the end of 2027.

Foreign entity rules. For projects that began construction after December 31, 2025, the credit can be denied if the project includes material assistance from a prohibited foreign entity. That is measured by a cost-ratio test, so some foreign-sourced content doesn’t automatically deny the credit. Notice 2026-15 provides interim guidance. Ask your developer to answer this with documentation.

Size-based rules. A system of 1 MW (AC) or more needs prevailing wage and apprenticeship compliance to get the 30% rate instead of 6%. For elective pay, a system that size that began construction after 2025 also generally must meet the domestic content requirement or the credit drops to zero, subject to narrow exceptions (for example, where U.S. content would raise costs by more than 25%). Systems under 1 MW avoid both rules, so the AC rating matters.

Placed in service and the tax year. The credit is earned in the tax year the system is placed in service, and that’s the return where you make the election. A late December versus early January date can move your claim a full year, and fiscal-year organizations should confirm which year the date falls in.

Registration. You can’t register until the system is placed in service, and each project needs its own registration number on the return. IRS guidance recommends registering at least 120 days before the due date, including extensions, of the return where you’ll report the credit. Our walkthrough of the filing sequence covers the steps from there.

How a nonprofit or city makes the election on Form 990-T

For a nonprofit or government, the election is made on Form 990-T, with Form 3800 and Form 3468 attached. That’s true even for entities that don’t otherwise file a federal return.

The election has to be made on an original return filed on time, including extensions. An amended return can’t fix a missed election. The only relief is a narrow automatic six-month window under Treas. Reg. §301.9100-2(b) for an organization that filed its original return on time.

Filing Form 990-T doesn’t mean you have unrelated business income. The IRS instructions give organizations filing only to make the election a shortened version of the form, with no Schedule A. Whether the project itself produces unrelated business income, say from selling power to an outside buyer, is a separate question that turns on your facts.

Questions to ask your solar developer or EPC before signing

• Under this contract, who owns the system on the day it’s placed in service?
• If this is a PPA or lease, how is your tax credit reflected in our rate?
• When did construction begin, or when will it, and what records support that date?
• What is the expected placed-in-service date, and what happens if it slips into the next tax year or past December 31, 2027?
• What is the AC capacity, and if it’s 1 MW or more, who documents wage, apprenticeship, and domestic content compliance?
• What supply-chain documentation will you provide for the foreign entity rules?
• When will we get the cost breakdown, commissioning records, and interconnection approval needed for registration?
• Are any bonds, grants, or rebates involved that could reduce the credit?

This article is general information, not tax advice, and it reflects IRS guidance as of September 16, 2026. Deadlines and eligibility depend on your organization's tax year and entity type. Please confirm your own facts with a qualified tax professional before relying on anything here.