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Get a Free QuoteTax-exempt entities can now receive the 30-70% ITC as a direct cash payment from the IRS. Plus Green Communities grants, MassCEC programs, SMART incentives, and virtual net metering.
Direct Pay ITC
30-70%
Cash from IRS
Green Communities
Up to $250K
Grant funding
PPA Alternative
$0.10-$0.16
Per kWh for municipalities
SMART 3.0
20 Years
Production incentives
Yes. Under the IRA's Direct Pay provision (Section 6417), tax-exempt entities — municipalities, school districts, nonprofits, churches, tribal governments — can receive the commercial solar ITC as a direct cash payment from the IRS. The base ITC is 30% of system cost, with bonus adders for domestic content (+10%), energy community (+10%), and low-income (+10-20%) potentially reaching 70%. For a $1M municipal solar system, this means $300,000-$700,000 in cash. Pre-filing registration through the IRS Energy Credits Online portal is mandatory before you file (the IRS recommends submitting it at least 120 days before your return due date). Direct pay changes only how the credit is monetized — the Section 48E placed-in-service timing still governs, and facilities under 1 MW are exempt from the 2026 domestic-content phaseout. Alternatively, municipalities can use PPA structures at $0.10-$0.16/kWh for zero upfront cost. Green Communities grants (up to $250K) and MassCEC programs provide additional funding.
Before the Inflation Reduction Act (IRA), municipalities, school districts, nonprofits, and other tax-exempt entities faced a fundamental barrier to solar adoption: the Investment Tax Credit (ITC) is a federal tax credit, and entities without federal tax liability could not use it. This forced most tax-exempt organizations into Power Purchase Agreements (PPAs) or leases where a for-profit developer owned the system, claimed the ITC, and passed savings through discounted rates.
The IRA's Direct Pay provision (Section 6417) fundamentally changed this equation. Now, eligible tax-exempt entities can elect to receive the ITC as a direct cash payment from the IRS — effectively converting the tax credit into a cash refund. This means a municipality installing a $1 million solar system with a 30% ITC receives $300,000 in cash from the IRS. With bonus adders, that amount can reach $500,000-$700,000.
For Massachusetts municipalities and nonprofits, Direct Pay is particularly powerful because it stacks with the state's already-strong solar incentives: SMART 3.0 production payments, virtual net metering credits, Green Communities grants, and MassCEC programs. The combination makes direct ownership competitive with — and often superior to — PPA arrangements for entities that have the capacity to manage a solar project.
Direct Pay is available to a broad range of tax-exempt entities. If your organization does not have federal tax liability, you are likely eligible. Here are the main categories of qualifying entities in Massachusetts.
City/town governments, municipal departments, public housing authorities
Public schools, regional school districts, charter schools
State agencies, county governments, regional transit authorities
Federally recognized tribal governments and their entities
Charitable orgs, hospitals, social service agencies, environmental groups
Houses of worship, religious schools, faith-based organizations
Member-owned electric cooperatives
The Direct Pay process requires careful timing and documentation. The most critical step is pre-filing registration — this MUST be completed before the solar system is placed in service. Missing this step can disqualify the entire Direct Pay election.
Register each project through the IRS Energy Credits Online portal. Registration must be completed before you file the return that makes the Direct Pay election, and the IRS recommends submitting it at least 120 days before your return due date (a recommendation, not a deadline). You receive a registration number that must appear on the return. Registration is separate from filing Form 990-T and does not change the Section 48E placed-in-service timing.
Complete the solar installation and place the system in service. Ensure all prevailing wage and apprenticeship requirements are met if the system exceeds 1MW AC. Document everything — the IRS will require proof of placed-in-service date.
Make the Direct Pay election on your annual tax return (Form 990-T for nonprofits, Form 1120 for certain entities). Include the registration number and calculate the applicable ITC amount. The election is irrevocable once made.
The IRS processes the Direct Pay election as an overpayment and issues a refund for the ITC amount. Processing follows normal IRS timelines — typically 6-12 months from filing. The refund is the full ITC amount calculated on system cost.
Pre-filing registration through the IRS Energy Credits Online portal is mandatory: you must have a registration number before you file the return that makes the Direct Pay election, and no registration number means no Direct Pay. The IRS recommends submitting the registration at least 120 days before your return due date (a recommendation, not a hard deadline), so start as soon as construction begins and interconnection is on file — do not wait until the return is due. Your tax advisor should handle the registration process.
Direct Pay provides the FULL ITC value including all applicable bonus adders. Tax-exempt entities are not limited to the base 30% — they can claim the same bonus adders as for-profit businesses. Many municipal and nonprofit projects in Massachusetts qualify for multiple adders, pushing the total ITC well above 30%.
| ITC Component | Rate | Example: 1MW ($1.2M) | Requirement |
|---|---|---|---|
| Base ITC | 30% | $360,000 | Prevailing wage + apprenticeship (>1MW) |
| Domestic Content | +10% | $120,000 | US steel/iron + rising manufactured-product threshold |
| Energy Community | +10% | $120,000 | Brownfield, coal community, or fossil fuel employment area |
| Low-Income (Tier 1) | +10% | $120,000 | Located in low-income census tract or tribal land |
| Low-Income (Tier 2) | +20% | $240,000 | Part of qualified low-income residential or economic benefit project |
| Maximum Total | 70% | $840,000 | All adders combined |
A typical Massachusetts municipal solar project often qualifies for at least the 30% base ITC plus the 10% low-income adder (many municipal facilities are in or serve low-income census tracts), bringing the total to 40%. Projects using domestic content components can reach 50%. This means a $1M system could receive $400,000-$500,000 in Direct Pay cash from the IRS — before any state incentives.
While Direct Pay provides the highest financial return, not every municipality or nonprofit has the administrative capacity, upfront capital, or risk tolerance for system ownership. Power Purchase Agreements (PPAs) remain an excellent alternative that delivers guaranteed savings with zero complexity.
In a municipal PPA, a private solar developer installs, owns, and maintains the solar system on your facility. Your entity purchases the electricity at a fixed rate — typically $0.10-$0.16/kWh — which is 30-50% below Massachusetts commercial retail rates of $0.22-$0.30/kWh. The developer claims the ITC, MACRS depreciation, and SMART payments, and passes the savings through the discounted PPA rate.
For detailed comparisons of ownership vs hosting models, see our Solar Roof Lease & Site Host Guide. For understanding the prevailing wage requirements that apply to Direct Pay projects, see our Prevailing Wage & Apprenticeship Guide.
Beyond federal Direct Pay, Massachusetts offers several state programs specifically designed to support solar adoption by public entities and nonprofits. These programs can stack with Direct Pay ITC and each other to dramatically reduce the net cost of solar.
Designation grants up to $250,000 for energy projects including solar. Competitive grants for designated Green Communities. Technical assistance for project development.
Eligible: Municipalities that adopt the Green Communities Act criteria (5 criteria including zoning for renewable energy)
Technical assistance, feasibility studies, and implementation grants for public facilities. Programs vary by year — check current offerings.
Eligible: Municipalities, public schools, public housing authorities, and certain nonprofits
20-year production-based incentive payments. Public entity adders and low-income adders can increase SMART rates. Available for systems on public or nonprofit facilities.
Eligible: All eligible solar systems on IOU territory (Eversource, National Grid, Unitil)
Energy efficiency improvements that reduce baseline consumption before solar installation. Free energy audits. Some facilities may qualify for weatherization funding.
Eligible: Commercial accounts on participating utilities
Allows municipalities to install solar at one location and allocate credits to other municipal accounts — police stations, fire departments, libraries, etc.
Eligible: Municipal and governmental entities within the same utility territory
On January 15, 2026 the Healey-Driscoll administration announced $1.2 million in DOER Low-Income Services Solar Program (LISSP) grants to three Massachusetts nonprofits — momentum for tax-exempt solar in the Commonwealth:
$398,000
Newton Food Pantry
17.3 kW AC + storage, ~$20k/yr savings
$500,000
Grow Associates (Randolph)
161.8 kW AC
$344,603
High Point Treatment Center (Plymouth)
280.5 kW AC
The following examples illustrate how Massachusetts municipalities and nonprofits are using Direct Pay and PPA structures to go solar. While details are generalized for illustration, they represent common project profiles we see across the state.
Regional school district in Central MA | Direct Pay ownership
System Size
500 kW across 3 school roofs
Cost
$800,000
Direct Pay ITC
$240,000 (30% base)
SMART Revenue
$480,000 (20-year total)
Annual Savings
$96,000/year electricity
Payback
4-5 years
Used Green Communities grant ($150K) + Direct Pay ITC ($240K) to cover 49% of system cost upfront. Virtual net metering allocates credits across all district buildings.
501(c)(3) community hospital in Western MA | PPA (third-party ownership)
System Size
1 MW ground-mount on hospital land
Cost
$0 upfront (developer-owned)
Direct Pay ITC
N/A (developer claims ITC)
SMART Revenue
Developer receives SMART
Annual Savings
$120,000/year (PPA at $0.14/kWh vs $0.26 retail)
Payback
Immediate savings, no investment
Hospital chose PPA over Direct Pay due to simpler administration. 25-year PPA at $0.14/kWh with 1.5% annual escalation. Developer handles all maintenance.
Every municipal and nonprofit project is unique. The right approach depends on your organization's financial capacity, risk tolerance, and administrative resources. Our team can model both Direct Pay ownership and PPA scenarios for your specific facility — see our Commercial Solar IRR Calculator for self-service modeling.
Complete commercial solar guide: ITC, SMART, pricing, and financing for all entity types.
Hosting solar on your roof without ownership — lease income or PPA savings.
Compliance guide for prevailing wage requirements that apply to all Direct Pay projects.
Model your project returns including Direct Pay ITC and state incentives.
Direct Pay (also called elective payment or Section 6417 of the IRA) allows tax-exempt entities — municipalities, school districts, nonprofits, churches, tribal governments — to receive the commercial solar ITC as a direct cash payment from the IRS instead of a tax credit. Since these entities have no federal tax liability, they traditionally could not use the ITC. Direct Pay solves this by converting the credit into a refundable payment. The base ITC is 30% of system cost, with bonus adders (domestic content +10%, energy community +10%, low-income +10-20%) potentially reaching 70%. For a $1M system, Direct Pay could mean $300,000-$700,000 in cash from the IRS.
We'll model Direct Pay vs PPA options for your facility, including all applicable ITC adders, Green Communities eligibility, and SMART incentives.