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U.S. Department of the Treasury, IRS Release Guidance on Provisions to Expand Reach of Clean Energy Tax Credits Through President Biden’s Investing in America Agenda
New Inflation Reduction Act Provisions Allow State, Local, and Tribal Governments, Non-profits, U.S. Territories, Rural Energy Co-ops, and More to Access Tax Credits for Building a Clean Energy Economy
Washington, D.C. — As part of the Biden-Harris Administration’s Investing in America agenda, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) today released guidance on key provisions in the Inflation Reduction Act to expand the reach of the clean energy tax credits and help build projects more quickly and affordably, which will create good-paying jobs, lower energy costs for families, and advance American innovation.
The Inflation Reduction Act created two new credit delivery mechanisms—elective pay (otherwise known as “direct pay”) and transferability—that enable state, local, and Tribal governments; non-profit organizations, U.S. territories; and other entities to take advantage of clean energy tax credits. Until the Inflation Reduction Act introduced these new credit delivery mechanisms, governments, many types of tax-exempt organizations, and even many businesses could not fully benefit from tax credits like those that incentivize clean energy construction.
“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 will act as a force multiplier, bringing governments and nonprofits to the table,” said Secretary of the Treasury Janet L. Yellen. “More clean energy projects will be built quickly and affordably, and more communities will benefit 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, including 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 three of those credits: the credits for Advanced Manufacturing (45X), Carbon Oxide Sequestration (45Q), and Clean Hydrogen (45V).
The Inflation Reduction Act also allows businesses not using elective pay to transfer all or a portion of any of 11 clean energy credits to a third-party in exchange for tax-free immediate funds, so that businesses can take advantage of tax incentives if they do not have sufficient tax liability to fully utilize the credits themselves. Entities without sufficient tax liability were previously unable to realize the full value of credits, which raised costs and created challenges for financing projects.
“Direct pay is a game-changer for our ability to spread the benefits of clean energy to every community in America,” said John Podesta, Senior Advisor to the President for Clean Energy Innovation and Implementation. “This provision of the Inflation Reduction Act will make it easier for local governments, Tribes, territories, nonprofits, schools, houses of worship and more to invest in clean energy, allowing them to save money, improve public health, and better serve their communities.”
Treasury’s proposed guidance today helps provide clarity for governments, tax-exempt organizations, and businesses to understand the law’s scope and eligibility requirements. The proposed regulations clarify which entities would be eligible for each credit monetization mechanism, lays out the process and timeline to claim and receive an elective payment or to transfer a credit, and addresses numerous other issues. Many of those issues were raised by stakeholders in response to Treasury’s far-reaching effort to solicit public input. The proposed regulations released today will now have a formal 60-day public comment period. Treasury and the IRS will carefully consider public feedback before issuing final rules.
Today’s guidance also includes temporary regulations for an electronic pre-filing registration requirement. The pre-filing process will help prevent improper payments to fraudulent actors like criminal syndicates and will provide the IRS with basic information to ensure that any taxpayer that qualifies for these credit monetization mechanisms can readily access these benefits.
Treasury and the IRS are committed to ensuring the process works for those who are eligible to take advantage of these provisions. Treasury and the IRS will provide more information about the pre-registration process later this year.
Treasury, working with interagency partners, will also conducting outreach to educate stakeholders, including through speaking engagements, webinars, and similar engagements in the coming months. This will include a series of webinars this summer, beginning on Thursday, June 29, where interested stakeholders can learn more. In addition, IRS.gov contains more information about the proposed and temporary guidance, as well as the underlying tax credits that can be used with elective pay and transferability.
Nearly three-quarters of the Inflation Reduction Act’s clean energy investment is delivered via tax incentives, putting Treasury at the forefront of this landmark legislation. Since the bill was signed into law last August, Treasury has worked expeditiously to write the rules that will make real the promise of this legislation. For a full list of Treasury’s work to implement the Inflation Reduction Act, see below:
IRS releases guidance on elective payments and transfers of certain credits under the Inflation Reduction Act
IR-2023-116, June 14, 2023
WASHINGTON — The Internal Revenue Service issued proposed regulations and frequently asked questions today describing rules for applicable entities that earn certain clean energy credits and choose to make an elective payment election and rules for eligible taxpayers that elect to transfer certain credits to unrelated parties.
- For tax years beginning after Dec. 31, 2022, applicable entities can choose to make an elective payment election, which will treat certain credits as a payment against their federal income tax liabilities rather than as a nonrefundable credit. This payment will first offset any tax liability of the entity and any excess will be refundable.
- Applicable entities generally include tax-exempt organizations, state and local governments, Indian tribal governments, Alaska Native Corporations, the Tennessee Valley Authority and rural electric cooperatives. All other taxpayers may elect to be treated as an applicable entity for a limited number of credits.
Also, for tax years beginning after Dec. 31, 2022, certain eligible taxpayers (generally taxpayers that are not applicable entities) can make an election to transfer all or a portion of an eligible credit to unrelated taxpayers for cash payments.
- The unrelated taxpayers are then allowed to claim the transferred credits on their tax return. The cash payments are not included in gross income of the eligible taxpayer and are not deductible by the unrelated taxpayers.
Temporary regulations were also issued today, providing rules that relate to a mandatory IRS pre-filing registration process, which will be through an electronic portal. The pre-filing registration process must be completed, and a registration number received, prior to making an elective payment election or an election to transfer eligible credits.
The process also applies prior to making an elective payment election related to advanced manufacturing investment credit amounts under the CHIPS Act of 2022
Proposed regulations were also issued today describing other issues related to the advanced manufacturing investment credit.
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