Direct Pay for Solar: How Nonprofits and Government Entities Qualify in 2026

What You’ll Learn

• What Direct Pay is and how it turns a tax credit into a cash payment
• Which organizations qualify as applicable entities under Section 6417
• How much a nonprofit or government entity can receive
• The construction deadlines and placed-in-service requirements for 2026
• The step-by-step process for claiming Direct Pay with the IRS
• How FEOC rules and domestic content requirements affect eligibility

What Is Direct Pay for Solar?

Direct Pay, formally known as Elective Pay under Section 6417 of the Internal Revenue Code, is a provision that allows tax-exempt organizations to receive the federal solar Investment Tax Credit as a cash payment from the IRS. Instead of reducing income tax liability, which tax-exempt entities do not have, the credit is treated as a tax payment and refunded directly to the organization.

This mechanism was created by the Inflation Reduction Act of 2022 and preserved by the One Big Beautiful Bill Act in 2025. It exists specifically to give nonprofits, houses of worship, schools, hospitals, local governments, tribal entities, and rural electric cooperatives equal access to solar incentives that were previously usable only by entities with federal tax liability.

For a qualifying organization that installs a $300,000 solar system, Direct Pay would result in a $90,000 cash refund from the IRS at the 30 percent credit rate, dramatically reducing the net cost of the project.

Who Qualifies for Direct Pay

Section 6417 defines an applicable entity as any organization that falls into one of the following categories:

• Tax-exempt organizations under Section 501(c) of the Internal Revenue Code, including 501(c)(3) charities, churches, synagogues, mosques, temples, and religious organizations
• State and local government entities, including municipalities, counties, school districts, public universities, and government agencies
• Tribal governments and Alaska Native Corporations
• Rural electric cooperatives engaged in furnishing electric energy to persons in rural areas
• The Tennessee Valley Authority

For-profit businesses do not qualify for Direct Pay. They claim the standard Section 48E Investment Tax Credit through their regular tax return or use the credit transferability provision under Section 6418 to sell the credit to another taxpayer.

How Much Is the Direct Pay Credit Worth

The base Direct Pay amount is 30 percent of qualified solar installation costs, which mirrors the standard Section 48E Investment Tax Credit. The credit applies to the total cost of panels, inverters, racking, wiring, battery storage when installed with solar, and installation labor.

Additional credit adders may increase the total:

• Domestic content adder: Up to 10 percent for projects using qualifying U.S.-manufactured components. For systems under 1 MW claiming Direct Pay, domestic content requirements must be met to receive the full 30 percent credit for installations completed in 2026 or later.
• Energy community adder: 10 percent for projects located in qualifying areas, such as brownfield sites or communities affected by fossil fuel industry closures
• Low-income community adder: 10 to 20 percent for projects located in designated low-income areas or on Indian land, available through an application process

For qualifying organizations that meet multiple adders, the effective credit rate can reach 50 to 70 percent of the total project cost. Even at the base 30 percent rate, Direct Pay transforms the economics of solar for organizations that previously had no way to access federal incentives.

Construction Deadlines for 2026

Direct Pay follows the same Section 48E construction deadlines that apply to all commercial solar projects. The critical dates are:

• Begin construction by July 4, 2026: The project qualifies for the full credit with a placed-in-service deadline of December 31, 2030, assuming the continuity requirement is met.
• Begin construction after July 4, 2026: The credit is only available if the project is placed in service by December 31, 2027.

For most nonprofits and government entities, the practical implication is that the project should be in motion now. Solar projects for institutional facilities typically require site assessments, board approvals, procurement processes, and permitting that can take several months. Starting the process in early 2026 ensures there is time to begin construction before the July deadline.

For solar systems of 1.5 MW AC or smaller, the 5 percent safe harbor method can be used to establish beginning of construction by paying or incurring at least 5 percent of total project costs before the deadline. For larger systems, the Physical Work Test applies.

How to Claim Direct Pay: Step by Step

Step 1: Install a Qualifying System

The solar system must be installed on property owned by or leased to the qualifying organization. The system must be placed in service, meaning it is fully installed, connected, and capable of generating electricity, during the tax year in which the credit is claimed.

Step 2: Pre-Register With the IRS

Before filing a tax return, the organization must register each qualifying energy property through the IRS Clean Energy Credit Pre-Filing Registration Tool. This registration generates a unique registration number for the property.

Step 3: File a Tax Return With the Elective Payment Election

The organization makes the elective payment election on its tax return for the year the system was placed in service. For most tax-exempt entities, this is Form 990-T. The registration number is included on the return, and the credit amount is reported as a payment against tax.

Step 4: Receive the Refund

The IRS processes the return and issues a refund equal to the credit amount. The refund may first be applied against any unrelated business income tax the organization owes, with the remaining balance refunded as cash.

The election must be made no later than the due date, including extensions, of the tax return for the taxable year in which the system was placed in service.

Domestic Content and FEOC Requirements

Organizations claiming Direct Pay should be aware of two important compliance requirements that affect eligibility and credit amounts.

For systems under 1 MW that claim Direct Pay and are placed in service in 2026 or later, the IRS requires that domestic content standards be met to receive the full 30 percent base credit. Systems that do not meet domestic content requirements receive a reduced credit of 20 percent. This rule specifically applies to Direct Pay claims and is more restrictive than the standard 48E credit for taxable entities.

For projects beginning construction after December 31, 2025, Foreign Entity of Concern restrictions also apply. The organization’s solar installer must certify that manufactured components do not exceed the material assistance threshold from entities connected to designated countries. Working with an experienced commercial solar installer who understands these sourcing requirements is essential.

Real-World Examples

Church or House of Worship

A church in suburban Philadelphia installs a 50 kilowatt rooftop solar system for $150,000. After placing the system in service and filing Form 990-T with the Direct Pay election, the church receives a $45,000 cash refund from the IRS. The system reduces the church’s annual electricity costs by approximately $8,000 to $10,000, and the net investment after the refund is $105,000, which is recovered through utility savings in 10 to 13 years.

School District

A public school district in southeastern Pennsylvania installs a 200 kilowatt ground-mounted system on unused land adjacent to a high school for $500,000. With the 30 percent base credit plus a 10 percent energy community adder, the district receives $200,000 in Direct Pay refunds. The system powers a significant portion of the school’s electricity needs and generates SRECs that provide additional annual revenue.

How Sunwise Can Help

Sunwise Energy has experience designing and installing solar systems for commercial and institutional clients across Pennsylvania, New Jersey, and Delaware. We guide organizations through every step of the Direct Pay process, from initial site assessment through IRS registration and filing support.

If your organization is considering solar, the time to begin planning is now. The July 4, 2026 construction deadline applies regardless of organization type, and early action ensures your project can qualify.

Direct Pay Solar FAQs

The information in this guide is for informational and educational purposes only and does not constitute legal, financial, or tax advice. We are not licensed tax advisors or financial professionals. The tax laws and regulations discussed are complex and subject to change and interpretation. Consult with a qualified tax professional to understand how these provisions apply to your organization’s specific circumstances.