IRS Direct Pay: Clean Energy Credits Made Easy

Not-for-profit and governmental entities now have the opportunity to take advantage of a new funding mechanism introduced by the Department of the Treasury and the IRS. The recently released regulations outline how applicable entities (AEs) and electing entities (EEs) can use the direct pay option established under the Inflation Reduction Act with regard to clean energy tax credits. These rules are designed to promote and streamline the use of direct pay by entities developing clean energy infrastructure projects as an alternative to traditional financing methods.

An election to claim direct pay under Section 6417 is a new way to help AEs and EEs finance clean energy projects and equipment. AEs, such as states, local governments, not-for-profits, tribal entities, Alaska Native corporations, the Tennessee Valley Authority, rural electric cooperatives and United States territories (and their political subdivisions), may elect to treat certain tax credits as a payment against U.S. federal income tax, which would potentially turn the applicable tax credit into a cash payment from the government. In other words, this election makes the relevant tax credits refundable. AEs may take direct pay in the year the property is placed in service for investment tax credits (ITCs) and the full duration of the production tax credits. The eligible tax credits for AEs under Section 6417 include:

• Section 30C (alternative fuel vehicle refueling property credit);
• Section 45 (renewable electricity production tax credit);
• Section 45Q (credit for carbon oxide sequestration);
• Section 45U (zero-emission nuclear power production credit);
• Section 45V (credit for production of clean hydrogen);
• Section 45W (credit for commercial clean vehicle);
• Section 45X (advanced manufacturing production credit);
• Section 45Y (clean electricity production credit);
• Section 45Z (clean fuel production credit);
• Section 48 (energy ITC);
• Section 48C (qualifying advanced energy project credit); and 
• Section 48E (clean electricity investment credit). 

The Section 6417 final regulations clarified many technical and procedural issues. For instance:

• All AEs must preregister their facilities with the IRS through its portal registration process.
• Taxpayers are encouraged to preregister their projects at least 120 days before filing their tax return to claim the direct pay. However, they cannot preregister until the project has been placed into service for that tax year.
• Upon registering through the portal, the taxpayer will receive a registration number that must be reported on Form 3468 (Investment Tax Credit) and attached to the current year's tax return.
• Not-for-profit organizations will claim these credits on their Form 990-T Exempt OrganizationBusiness Income Tax Return
• The eligible investment tax credit will be applied first as a reduction to unrelated business income tax liability, to the extent there is such liability, and the difference will be refunded.
• The IRS processing time could be 90 to 120 days once the returns are e-filed.
• The introduction of the direct pay mechanism under Section 6417 offers an opportunity for not-for-profit and governmental entities to enhance the way they fund clean energy projects. By converting eligible tax credits into direct cash payments, these entities can unlock substantial financial benefits.
• Recently the IRS granted six-month automatic extension for Form 990-T for entities that would qualify for elective pay for taxable year ending between Dec. 31, 2023, through Nov. 30, 2024, providing other requirements are met. This is especially important for organizations filing Form 990-T solely to receive the energy credits because they would not ordinarily file extension for this form, thereby losing access to these valuable credits.
• Part of the Revenue Procedure 2024-39 the IRS also provided specific procedure to follow for AE that received a notice that the elective payment election was ineffective because it was filed late due to not filing the extension for Form 990-T.

For more information on the direct pay option and clean energy tax credits, please visit the IRS siteor connect with our tax experts.