Under final rules released by the Internal Revenue Service (IRS) on March 5, 2024, tax-exempt organizations now have direct access to tax credits from renewable energy projects through Section 6417 of the Inflation Reduction Act (IRA).
Section 6417 allows tax-exempt organizations (among other “applicable entities”) to elect to treat an applicable tax credit as a tax payment equal to the value of the credit. A tax-exempt organization is then entitled to a refund in the amount of the elective payment, effectively making the applicable tax credit refundable to the organization as a direct payment.
Organizations looking to claim credits for projects placed into service in 2023 can now register with the IRS in order to make an elective payment election on their annual tax return.
Direct pay is primarily available to applicable entities that would not otherwise have access to tax credits due to their tax-exempt status. This includes not-for-profits, states, local governments, Indian tribal governments and rural electricity co-ops.
There are 12 IRA tax credits eligible for direct pay under Section 6417:
Any credits for which an elective payment is made must have been determined with respect to the applicable entity — that is the applicable entity must generally own the underlying property and conduct the activities giving rise to the credit. Developers working with applicable entities on renewable energy projects should bear in mind that, for most tax credits, only an applicable entity is entitled to direct pay. Other taxpayers can make direct-pay elections, but only for Section 45V clean hydrogen PTCs, Section 45Q carbon capture credits and Section 45X advanced manufacturing credits.
An applicable entity must complete the pre-filing registration process through the IRS online portal (https://www.irs.gov/credits-deductions/register-for-elective-payment-or-transfer-of-credits) and obtain a registration number in order to make an elective payment. Each credit-bearing property must have its own registration number. A registration number does not necessarily mean that the applicable entity will be eligible for direct payment. The IRS advises registering:
The elective payment election must be made on the applicable entity’s original tax return — or through Form 990-T if the entity does not file an annual return — and on Form 3800 for General Business Credit. A separate election must be made for each applicable credit-bearing property. No initial election can be made on an amended return or by filing an administrative adjustment request. The election and return must be filed by the return due date for the taxable year for which the election is made. The direct payment is delivered once the IRS processes the tax return.
To be eligible for direct pay, a project must have been placed in service after 2022. Moreover, direct-pay elections for certain tax credits — such as Section 45Y(a) and Section 45(a) PTCs — must be made in the year that the qualifying facility was placed into service.
NYSERDA recently published a guide on the mechanics of direct pay for not-for-profits and municipalities: https://www.nyserda.ny.gov/Featured-Stories/IRA-Guide-for-Nonprofits-and-Municipalities. The guide gives an overview of the eligible renewable energy projects as well as the process for applying and receiving direct pay.
As ever, the IRA is constantly evolving through new guidance. Simultaneous with its release of the final elective payment rules, the IRS issued additional proposed rules and a preliminary notice that could further reshape Section 6417. Under the proposed rules, applicable entities that co-own a credit-bearing property through an unincorporated organization will become eligible for direct pay, so long as the organization meets certain requirements. And in its Notice 2024-27, the IRS revealed that it is now open to making tax credits purchased via Section 6418 eligible for direct pay under Section 6417. This process, known as “chaining,” is prohibited under the final elective payment rules. We will continue to monitor the evolution of Section 6417 as these and other changes continue to unfold.
Additional Assistance
For further assistance, please contact a member of our Energy and Renewables Industry Team or the Phillips Lytle attorney with whom you have a relationship.
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