The IRS released proposed regulations and temporary regulations addressing the elective-pay and transferability of clean energy credits of § 48D related to new options enabled by the Inflation Reduction Act of 2022.
On June 14, 2023, the U.S. Treasury and the IRS released proposed regulations and temporary regulations addressing the elective-pay and transferability of clean energy credits of § 48D related to new options enabled by the Inflation Reduction Act of 2022. The IRS also issued frequently asked questions 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.
Under prior guidance, tax-exempt and governmental entities were generally unable to use tax credits. Under the proposed rules, these entities can now benefit from clean energy tax credits using new options. In some situations, other taxpayers can also benefit from the clean energy tax credits in new ways. The IRS is expected to issue more guidance about how to claim these clean energy tax credits in late 2023.
The elective pay, also known as direct pay, option makes certain clean energy tax credits effectively refundable. With elective pay, an eligible entity (such as a local government) that qualifies for a clean-energy investment tax credit can notify the IRS of their intent to claim the credit and file an annual tax return to claim elective pay for the full value of the credit. The IRS would then pay the local government the value of the credit.
Transferability allows entities that qualify for a tax credit but are not eligible to use elective pay to transfer all or a portion of the credit to a third-party buyer in exchange for cash. The buyer and seller would negotiate and agree to the terms and pricing.
Eligibility, Process and Applicable Benefits
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.
The Temporary Regulations provide rules relating 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 describing other issues related to the advanced manufacturing investment credit.
Navigating the new credits can be difficult and confusing. There are significant accounting implications also. Contact your TaxOps advisor for guidance.
IRS Related Sources
- Elective Pay and Transferability Frequently Asked Questions
- IR-2023-117, Treasury, IRS issue guidance for the advanced manufacturing investment credit
- IR-2023-116, IRS releases guidance on elective payments and transfers of certain credits under the Inflation Reduction Act
- Inflation Reduction Act of 2022
At TaxOps, we concentrate on advising our clients on changes that might impact their tax planning. Reach out to your TaxOps Min advisor for more guidance on clean energy credits.