On June 14, the Treasury Department and the IRS proposed long-anticipated guidance addressing the monetization of renewable energy tax credits enacted as part of the Inflation Reduction Act, including the direct pay election.
The proposed regulations and frequently asked questions explain what taxpayers, including tax-exempt organizations, will need to do to make a direct payment election to obtain renewable energy credits enacted as part of the Inflation Reduction Act (IRA). The direct pay election allows an institution to use certain energy tax credits as an offset to any taxes owed, with any excess received as a direct payment from the government.
The direct pay components of the IRA tax credits are aimed at bringing additional capital to clean energy projects by enabling credits to be monetized, even if the owners of such projects do not have tax liability to use the credits.
Highlights of Direct Pay Election
The proposed rules state that all public agencies or entities categorized as instrumentalities of their state are eligible for direct payment of the IRA credits, clearing up initial confusion regarding eligibility for certain public colleges and universities.
A direct pay election generally—
- Applies separately to each applicable facility or property
- Must be made in the first year the facility of applicable equipment is placed in service; and
- Applies for the full applicable credit term period.
Certain credits link the ability to elect direct pay to domestic content requirements, such as the clean vehicle credits.
To claim the credit, a taxpayer must own or conduct activities on the underlying credit property on which the credit is based. A direct pay election may only be made on an original annual tax return filed by the due date (including extensions) for the original return for the tax year for which the applicable credit is determined, beginning with tax year 2023. Elections cannot be made or revised on an amended return or by filing an administrative adjustment request.
Pre-filing Registration Requirements
Institutions planning to elect direct payment of a clean energy credit must complete the pre-filing registration process described in temporary regulations. Under the pre-filing requirements, taxpayers seeking to make a direct pay election must obtain a registration number for each eligible property by supplying the required information about the applicable credits that will be claimed. The IRS will review the submitted information and issue a separate registration number for each applicable credit property, which will be valid for one year and will need to be renewed each year.
The proposed rules also outline the methodology for taxpayers to determine their direct-pay-eligible amount, which will first offset their current-year tax liability, with any excess credit being refundable. Taxpayers should pay special attention to the pre-filing registration requirements as these requirements are a condition precedent to making an effective direct-pay election. Since institutions must complete the registration for each eligible facility or property, it is likely that a college or university utilizing clean energy credits over multiple projects will need to complete, and possibly renew, multiple registrations each tax year.
Comments on the proposed rules must be submitted to the IRS by August 14. Until final rules are adopted, institutions may rely on these proposed regulations as they approach claiming the credits.