The U.S. Department of the Treasury and the Internal Revenue Service (IRS) released final rules this week to expand the reach of the clean energy tax credits.
Two new credit delivery mechanisms — elective pay (or direct pay) and transferability — were created by the Inflation Reduction Act to help state and local entities take advantage of clean energy tax credits. Until the Inflation Reduction Act introduced these mechanisms, governments, some tax-exempt organizations, and many businesses could not fully benefit from tax credits that incentivize clean energy deployment.
“The Inflation Reduction Act’s new tools to access clean energy tax credits are a catalyst for meeting President Biden’s historic economic and climate goals. They are acting as a force multiplier, bringing governments and nonprofits to the table for the first time and enabling companies to realize greater value from incentives to deploy new clean power and manufacture clean energy components,” Secretary of the Treasury Janet Yellen said. “More clean energy projects are being built quickly and affordably, and more communities are benefitting from the growth of the clean energy economy.”
The Inflation Reduction Act allows tax-exempt and governmental entities to receive elective payments for 12 clean energy tax credits. This includes the major Investment and Production Tax credits, as well as tax credits for electric vehicles and charging stations. Businesses can also choose elective pay for Advanced Manufacturing, Carbon Oxide Sequestration, and Clean Hydrogen. Further, the Inflation Reduction Act also allows businesses to transfer all or a portion of any of 11 clean energy credits to a third-party in exchange for tax-free immediate funds. Previously, entities without sufficient tax liability were unable to realize the full value of credits.
The elective pay final rules provide certainty for applicable entities to understand the law’s scope and requirements for eligibility. The final rules also lay out the process and timeline to claim and receive an elective payment.
Along with final rules on elective pay, Treasury also issued a separate Notice of Proposed Rulemaking (NPRM) that is intended to provide further clarity and flexibility for applicable entities that that co-own clean energy projects and would like to utilize elective pay.
Under the IRA, entities treated as partnerships for federal tax purposes are not eligible for elective pay, regardless of whether one or more of its partners is an applicable entity. However, the proposed elective pay regulations clarified that there are pathways for entities to access elective pay for credits it earns through a joint ownership arrangement. Specifically, these proposed regulations would permit renewable energy investments to be made through a noncorporate entity, rather than requiring direct co-ownership of the property or facility by the applicable entity and modify certain joint marketing restrictions to provide that multi-year power purchase agreements would not violate the requirements to elect out of partnership tax treatment.
Treasury and IRS welcome written comments submitted through regulations.gov. The comment period is open until May 10.