The U.S. Department of the Treasury and the IRS released final regulations designed to help entities access clean energy tax credits through elective pay, also known as direct pay.

Direct pay makes certain clean energy tax credits refundable as direct payments for entities, such as non-profits, that don’t have the tax liability to make use of credits. The entity can receive the full value of the credit because the IRS treats the elective payment amount as a tax payment. IRS then counts it as overpayment on the return and refunds it to the entity.

Eligible entities for direct pay include tax-exempt organizations, state and local governments, schools, churches Indian tribal governments, Alaska Native Corporations, the Tennessee Valley Authority and rural electric cooperatives. 

Since passage of the Inflation Reduction Act (IRA) in 2022, direct pay enables these entities and organizations to access the full value of clean energy incentives. The final regulations provide greater clarity and flexibility for direct pay eligible entities that want to jointly invest in clean energy projects.

“Direct pay is helping more clean energy projects be built quickly and affordably, and American communities are benefitting as a result,” said U.S. Deputy Secretary of the Treasury Wally Adeyemo. “Today’s rules will increase the availability of capital for clean energy projects by providing certainty and flexibility for state and local governments, Tribes and territories, non-profits, and more to benefit from these resources.”

Under the IRA, partnerships are not among the entities that are generally eligible for direct pay. Treasury’s final regulations make targeted modifications to existing partnership tax rules. By collectively electing out of partnership status, co-owners that are eligible for direct pay can take advantage of direct pay for the share of the project that they own, while co-owners that are not eligible for elective pay could use tax credit transferability.

A statement released by the Treasury Department noted that in response to comments received, the final regulations clarify that eligible co-ownership arrangements can be organized to own and operate property giving rise to any of the IRA credits where elective pay is available. It also enables such arrangements to invest in clean energy projects through a noncorporate entity.

Popular content