On Wednesday, June 14, 2023, the Treasury Department and IRS released proposed guidance on elective pay and transferability. Elective pay and transferability are the two credit delivery mechanisms provided by the Inflation Reduction Act of 2022 to expand the reach of clean energy tax credits. Following the 60-day public comment period, Treasury and the IRS will issue their finalized guidance.
What is elective pay?
Elective pay—also called direct pay–is a method for tax-exempt and governmental entities that do not owe Federal income taxes to receive payment for building clean energy projects or making clean energy investments. Payment will be equal to the full value of the tax credits for which they qualify.
Eligible entities who meet all requirements, including a pre-filing registration requirement, can receive tax-free cash payments from the IRS if they file a return and use elective pay for an applicable clean energy tax credit. Entities must complete the pre-filing registration with the IRS before the tax return is due and then file the return before the deadline, unless an extension is taken. Once the return is processed, entities will receive their payment.
Who is eligible for elective pay?
Tax-exempt and governmental entities are eligible for elective pay. Specifically, this includes:
- Organizations exempt from taxation by § 501(a), which covers organizations described in § 501(c) and § 501(d)
- State, local, and political subdivisions, agencies, and instrumentalities, which include Indian tribal governments, Washington D.C., and, in a limited capacity, U.S. territories.
- Alaska Native Corporations
- Rural electric cooperatives
- Tennessee Valley Authority
Businesses may also be treated as applicable only for the tax credits for carbon oxide sequestration, clean hydrogen production, and advanced manufacturing production.
Which tax credits are applicable for elective pay?
Elective pay can be used for 12 Inflation Reduction Act tax credits.
Tax Credits for Energy Generation and Carbon Capture:
- Renewable Electricity Production Credit
- Clean Electricity Production Credit
- Energy Property Investment Credit
- Clean Electricity Investment Credit
- Low-Income Communities Bonus Credit (application required)
- Carbon Oxide Sequestration Credit
- Zero-Emission Nuclear Power Production Credit
Tax Credits for Manufacturing:
- Advanced Energy Project Credit (application required)
- Advanced Manufacturing Production Credit
Tax Credits for Vehicles:
- Commercial Clean Vehicle Credit
- Alternative Fuel Vehicle Refueling Property Credit
Tax Credits for Fuels:
- Clean Hydrogen Production Credit
- Clean Fuel Production Credit
Grants and loans:
Elective pay differs from grants and loans: Under grant and loan programs, applicants may not receive the award, whereas payments under elective pay will be made to an entity if it meets the eligibility and tax credit requirements.
The proposed guidance also outlines a special rule enabling tax credits to be combined with grants and forgivable loans.
Where can I find more information?
Clean Energy Tax Incentives Chart