{"id":105306,"date":"2024-03-05T15:44:09","date_gmt":"2024-03-05T20:44:09","guid":{"rendered":"https:\/\/\/?p=105306"},"modified":"2024-03-05T15:44:09","modified_gmt":"2024-03-05T20:44:09","slug":"final-irs-rules-released-on-ira-direct-pay-and-transferability","status":"publish","type":"post","link":"https:\/\/\/2024\/03\/final-irs-rules-released-on-ira-direct-pay-and-transferability\/","title":{"rendered":"Final IRS rules released on IRA direct pay and transferability"},"content":{"rendered":"

The Dept. of the Treasury and the Internal Revenue Service (IRS) released final rules<\/a> on key provisions in the Inflation Reduction Act (IRA) to expand the reach of the clean energy tax credits.<\/p>\n

The IRA created two new credit delivery mechanisms<\/a> \u2014 elective pay (otherwise known as \u201cdirect pay\u201d) and transferability \u2014 that will 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 even many businesses, could not fully benefit from tax credits like those that incentivize clean energy deployment.<\/p>\n

\u201cThanks to President Biden\u2019s Inflation Reduction Act, local governments, nonprofits, and other non-taxable entities can now claim clean energy tax credits for the first time,\u201d\u00a0said\u00a0John Podesta, Senior Advisor to the President for International Climate Policy. \u201cToday\u2019s final rule provides additional clarity for organizations so they can take full advantage of this game-changing opportunity to expand clean energy all across America.\u201d<\/p>\n

The Inflation Reduction Act allows\u00a0tax-exempt<\/a>\u00a0and\u00a0governmental<\/a> entities to receive elective payments for 12 clean energy tax credits, including the ITC and PTC (Sec. 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).<\/p>\n

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. This raised costs, created challenges for financing projects, and limited the ability of communities and other organizations to realize the full economic and environmental benefits of clean energy. Final rules on transferability will be finalized in the near future.<\/p>\n

Treasury\u2019s elective pay final rules provide certainty for applicable entities to understand the law\u2019s scope and requirements for eligibility. The final rules also lay out the process and timeline to claim and receive an elective payment. Treasury also issued\u00a0a separate Notice of Proposed Rulemaking (NPRM) that<\/a>\u00a0is intended to provide further clarity and flexibility for applicable entities that that co-own clean energy projects and would like to utilize elective pay.<\/p>\n

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 \u201celecting out\u201d 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.<\/p>\n

The section 761(a) NPRM issued today 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.<\/p>\n

Specifically, these proposed regulations would:<\/p>\n