IRS Provides Guidance to Expand Clean Energy Credits Through Elective Transfer Under the Inflation Reduction Act

The U.S. Department of the Treasury released proposed regulations and frequently asked questions describing rules for applicable entities that earn certain clean energy credits. These entities may choose to make a payment election under the recently issued guidance that provides rules for eligible taxpayers electing to transfer certain credits to unrelated parties.

The Inflation Reduction Act (IRA) created two new credit implementation processes—direct pay and transferability—to incentivize clean energy construction among entities unable to take advantage of tax credits, such as nonprofit organizations and state and local governments. The new credit delivery mechanisms allow these formerly ineligible entities to benefit from the new credits available under the IRA.

For tax years beginning after December 31, 2022, applicable entities are eligible to make an elective payment, which will treat certain clean energy tax credits as a payment against their federal income tax liabilities, rather than as a nonrefundable credit. This payment will first offset any tax liability of the entity, and any excess will be refundable.

Applicable entities generally include tax-exempt organizations, state and local governments, Indian tribal governments, Alaska native corporations, the Tennessee Valley Authority, and rural electric cooperatives. All other taxpayers may elect to be treated as an applicable entity for a limited number of credits.

In addition, for tax years beginning after December 31, 2022, certain eligible taxpayers (generally taxpayers other than the applicable entities mentioned above) can make an election to transfer all or a portion of an eligible credit to unrelated taxpayers for cash payments. These unrelated taxpayers may claim the transferred credits on their tax returns. The guidance provides that the cash payments are not included in gross income of the eligible taxpayer and are not deductible by the unrelated taxpayers.

Temporary regulations were also issued to provide rules relating to a mandatory IRS pre-filing registration process, which will be facilitated through an electronic portal. This registration process must be completed, and a registration number received, prior to making an elective payment election or an election to transfer eligible credits. These temporary rules will expire on June 12, 2026.

Please contact one of the Ryan tax professionals below to learn how these new rules could impact your business.

TECHNICAL INFORMATION CONTACTS:

Ian Boccaccio
Principal
Ryan
469.399.4545
ian.boccaccio@ryan.com

Nicholaus List
Senior Manager
Ryan
917.472.9472
nicholaus.list@ryan.com

The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at info@ryan.com.