Don’t let tribal energy grants jeopardize your energy tax credits
- If tribal energy grants are used to pay for credit-eligible project costs, the taxable basis for incentives such as the Clean Electricity Investment Tax Credit may be reduced, lowering the total credit received.
- Tribes can preserve more tax credit value by using grant funds for planning, feasibility studies, engineering, environmental reviews and other predevelopment activities while using general funds for credit-eligible energy equipment.
- Before contracts are signed or budgets finalized, tribal leaders, finance teams, engineers, legal counsel and tax advisors should coordinate funding strategies to maximize both grant benefits and available energy tax incentives.
The Department of Energy’s Unleashing Tribal Energy Development grant provides opportunities for tribes to improve energy reliability and independence on their reservations. These grants offer the potential for significant windfalls for tribes. But there’s a catch many organizations overlook: Using the grants to pay for energy products could reduce the energy tax credits they receive.
Keep reading to learn some strategies for using grant money on energy projects without increasing your tribes tax liability.
What is the Unleashing Tribal Energy Development grant?
DOE’s Office of Indian Energy created the $50 million Unleashing Tribal Energy Development grant to help tribal communities develop affordable, reliable and secure energy resources while advancing tribal sovereignty and economic development. Awards will range from $250,000 to $7.5 million, depending on project type.
The funding supports three primary categories:
- Construction and installation of community-scale tribal energy projects.
- Predevelopment activities that move projects from concept to implementation-ready.
- Planning, assessment and feasibility work for larger-scale energy projects designed to create future economic development opportunities.
Some examples of projects supported by this grant money include solar installations, battery storage, microgrids and geothermal systems.
Energy tax credits available to tribes
Federal clean energy incentives have dramatically expanded opportunities for tribal governments to save money.
Tax credits your tribe could be eligible for include:
- Clean Electricity Investment Tax Credit: This credit generally begins at 30% of qualified investment costs for eligible clean electricity projects, including solar, wind, geothermal, battery storage and certain microgrid equipment. Bonus credits may increase the total benefit when projects satisfy additional requirements. Certain qualifying solar and wind facilities located on tribal land or serving eligible low-income communities may qualify for additional investment credit percentages.
- Clean Electricity Production Tax Credit: Instead of claiming a credit based on project cost, qualifying projects may receive production-based credits for electricity generated during the first 10 years of operation. This can be especially valuable for larger facilities that produce electricity for tribal operations or for sale to utilities.
How can using grant money reduce energy tax credits for tribes?
Tax credits are generally tied to qualified project costs, and government grants can affect the final credit amount. For tribes using elective pay, grant funding does not automatically reduce the cost basis used to calculate an investment tax credit. If a grant is specifically restricted to buying or building the credit-eligible energy property, the credit may be reduced. The restricted grant funding plus the credit cannot exceed the property’s cost.
A practical way to think about the limitation is:
Maximum credit = Property cost - restricted grant funding
Actual credit = Lesser of:
1. Property cost × credit percentage, or
2. Property cost - restricted grant funding
For example, assume a tribe installs a $1 million solar energy system that qualifies for a 30% investment tax credit and uses a $500,000 grant restricted to that system. The credit calculated before applying the grant limitation is $300,000. Because the $500,000 grant plus the $300,000 credit equals $800,000, which does not exceed the $1 million project cost, the credit would not be reduced.
On the other hand, if the same $1 million project received an $800,000 restricted grant, the 30% credit would initially be $300,000. Because the $800,000 grant plus the $300,000 credit would total $1.1 million, exceeding the project cost by $100,000, the credit would be reduced by $100,000, from $300,000 to $200,000.
How can tribes use grant money without losing tax credits?
Energy grant money can be used without jeopardizing tax credits. It just needs to be analyzed strategically. Unrestricted or non-property-specific grants generally avoid the restricted-tax-exempt-amount limitation. You determine whether it is restricted when the grant is awarded. Review the award terms, budget categories, application and grant agreement to determine whether funds are specifically restricted to credit property.
Your tribe should consider directing grant dollars to eligible project costs that are less likely to drive tax credit value, such as planning, assessment, feasibility, predevelopment or other non-credit costs. Because Unleashing Tribal Energy Development funds may support a range of activities — from early-stage planning to construction and installation — the funding plan should identify which costs generate tax credits and, where possible, reserve non-grant funds for those costs
Four strategies to help preserve tax credit value when using grant funds:
1. Use grant funds for predevelopment and readiness activities
Grant funds can be used to pay for engineering studies, feasibility assessments, site analyses, environmental reviews, grid modeling and other project-readiness tasks.
Many of these activities do not have a tax credit. Using grant dollars for predevelopment may help your tribe preserve general funds for credit-eligible equipment and systems.
2. Use general funds for credit-eligible energy property
Prioritize using your own funds or other non-grant sources to pay for the portions of the project that generate tax credits, such as solar panels, battery storage, microgrid controllers, geothermal equipment or other qualifying energy systems. This can help preserve the full eligible cost basis for the tax credit.
3. Separate the energy system from the surrounding project costs
You may have projects that include both credit-eligible energy equipment and broader infrastructure or construction costs. Where permitted by the grant terms, grant funds may be better suited for non-credit or less credit-sensitive costs, while other funding sources may be reserved for credit-eligible energy property.
For instance, a tribe might be building a new community facility that includes a solar system, battery storage and supporting site infrastructure.
In this case, identify which costs are directly tied to the energy system and which are related to broader construction. Using grant money to cover the costs of building a structure to protect the solar system and general funds for the actual system could preserve the tax credit value. Your tribe will need to review what construction costs grant money can be applied to.
4. Document funding sources and project costs carefully
Tribes should avoid treating the project as one large pool of costs. Instead, they should itemize costs to show:
- Which costs are grant-funded.
- Whether the grant funds are restricted or unrestricted.
- Which costs are paid by general funds or other sources.
- Which costs are included in the tax credit calculation.
- Which costs are excluded from the tax credit calculation.
- How the allocation aligns with grant requirements and tax rules.
- Whether bonus credits, prevailing wage, domestic content or beginning-of-construction requirements apply.
This documentation is not just helpful for tax credit calculations. It can also support grant compliance, board reporting, audit readiness and long-term financial stewardship.
What planning needs to be done to maximize grants and tax credits?
A plan to protect tax incentives needs to be in place before signing contracts or finalizing the project budget. After payment decisions have already been made, it may be too late to avoid a reduction in the credit.
When developing a strategy to leverage grant money and incentives, be sure all stakeholders are involved, including:
- Tribal leadership
- Finance and accounting teams
- Project engineers
- Construction partners
- Tax advisors
- Legal counsel
These are the questions you need to answer when crafting a strategy:
- Which project costs are eligible under the grant?
The tribe needs to understand what the grant can cover within the selected topic area. - Which project costs are eligible for tax credits?
The tribe should identify the specific assets or systems that generate ITC, PTC, bonus credit or other incentive value. - Which funding source should pay for each cost category?
The funding plan should be designed to preserve tax credit value where possible. - Are there deadlines or beginning-of-construction requirements?
Wind, solar, direct-pay filings, and bonus credit opportunities may require timely action and documentation. - What documentation will be needed later?
Tribes should collect contracts, invoices, proof of payment, cost allocations, engineering documents and other records throughout the project.
How Wipfli can help
Wipfli can help tribes evaluate how energy tax credits, direct pay and grant-funded project costs interact before key funding decisions are made. Our team of professionals can educate project teams early, coordinate with advisors throughout design and construction, and help ensure that grant funds are used as effectively as possible. Start a conversation.
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