Final rule to expand clean energy tax credits issued by Treasury

The final rules to expand the reach of the clean energy tax credits were issued this week by the U.S. Treasury Department and the Internal Revenue Service (IRS).

The Inflation Reduction Act created new credit delivery mechanisms — elective pay (or direct pay) and transferability — to help state and local entities take advantage of clean energy tax credits. Until these new credit delivery mechanisms were introduced, governments, many tax-exempt organizations, and many businesses could not fully benefit from tax credits that incentivize clean energy deployment.

““President Biden’s Investing in America agenda has created game changing opportunities to ensure the health and savings benefits of clean energy solutions transform all aspects of American life,” Secretary of Energy Jennifer Granholm said. “Energy costs are the second-highest expense for nonprofits, and now, for the first-time ever nonprofits, from hospitals to food banks, can amplify their impacts thanks to direct payments for installing clean energy technologies using every dollar saved to reinvest in crucial community services.”

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.