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Final rules on IRA provisions further expand access to tax credits

Final rules on IRA provisions further expand access to tax credits

The U.S. Department of the Treasury and the Internal Revenue Service (IRS) released final rules on key provisions in the Inflation Reduction Act to expand the reach of the clean energy tax credits.

The Inflation Reduction Act created two new credit delivery mechanisms—elective pay (or direct pay) and transferability—that are meant to help enable state, local, and Tribal governments; non-profit organizations; Puerto Rico and other 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 some businesses could not fully benefit from tax credits like those that incentivize clean energy deployment.  

“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,” said Secretary of the Treasury Janet L. Yellen. “They are acting as a force multiplier, bringing governments and nonprofits to the table for the first time and enabling companies to realize greater value from incentives to deploy new clean power and manufacture clean energy components. More clean energy projects are being built quickly and affordably, and more communities are benefitting from the growth of the clean energy economy.”

GO DEEPER: Jose Zayas, EVP of Policy and Programs, American Council on Renewable Energy joined the Factor This! podcast to break down the key components of the historic Inflation Reduction Act, which includes $369 billion dedicated to clean energy and climate change.

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 (45 and 48) 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 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, leaving only corporations able to take advantage of federal tax incentives. Final rules on transferability will be finalized in the near future.

Treasury’s elective pay final rules are intended to 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 today 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, and the final regulations confirm, that there are pathways for an applicable entity to access elective pay for credits it earns through a joint ownership arrangement including validly “electing out” of partnership tax treatment. Treasury and IRS agreed with commenters that existing guidance on making a valid election out of partnership tax treatment for clean energy arrangements was limited, and updates were needed for these arrangements to be more effective.

The section 761(a) NPRM issued provides a broader and more accessible pathway for applicable entities that co-own renewable energy projects to elect out of partnership tax status and therefore access elective pay. To qualify under these proposed rules, co-ownership arrangements must be organized exclusively to produce electricity from their applicable credit property, have one or more applicable entity co-owners that will claim elective pay, and meet certain other requirements.

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;
  • 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.