Internal Revenue Service Releases Final Rules on Direct Pay Elections for Eligible Energy Credits

The Internal Revenue Service (IRS) issued final regulations (TD 9988) on March 5, 2024, on the direct pay elections for energy credits under Internal Revenue Code (IRC) Section 6417. This election was added under the Inflation Reduction Act of 2022, allowing for the treatment of certain tax credits as payment of federal income tax.

The regulations describe rules for the elective payment of these tax credit amounts in a taxable year, including definitions and special rules applicable to partnerships and S corporations and regarding repayment of excessive payments. In addition, the regulations clarify rules related to a required IRS prefiling registration process and update the Frequently Asked Questions on the elections. Generally, the final regulations adopt the proposed regulations with some modifications. These regulations are effective 60 days after publication in the Federal Register.

The direct pay election applies to the following 12 energy credits:

• Section 30C – Alternative Fuel Refueling Property Tax Credit
• Section 45 – Clean Energy Production Tax Credit
• Section 45 Q – Carbon Capture and Sequestration Tax Credit
• Section 45U – Zero-emission Nuclear Power Production Tax Credit
• Section 45V – Clean Hydrogen Production Tax Credit
• Section 45W – Qualified Commercial Clean Vehicles Tax Credit
• Section 45X – Advanced Manufacturing Production Tax Credit
• Section 45Y – Clean Electricity Production Tax Credit
• Section Z – Clean Fuel Production Tax Credit
• Section 48 – Clean Energy Investment Tax Credit
• Section 48C – Advanced Qualified Energy Investment Tax Credit
• Section 48E – Clean Electricity Investment Tax Credit

The key takeaways from the final regulations include the following points:

• Definition of applicable entities:
  • tax exempt organizations – entities defined in IRC Sections 501-530;
  • governments, including local, tribal, and territorial, and agencies/instrumentalities;
  • Alaska native corporations; and
  • Tennessee Valley Authority, and rural electric co-ops.

• Final rules are included for the preregistration process that is mandatory for applicable entities or electing taxpayers. Definitions include the manner and timing of prefiling, process for election for members of a consolidated group, and other requirements of the prefiling process. The biggest clarification is that the IRS does not want registration until the energy property is placed in service.

• The elective payment election must be made no later than the due date (including an extension of time) for the original return that would be due based upon the placed-in-service tax year. Therefore, no elective payment election may be made for the first time on an amended return, withdrawn on an amended return, or made or withdrawn by filing an administrative adjustment request under Section 6227, although a numerical error with respect to a properly claimed elective payment election may be corrected on an amended return or by filing an administrative adjustment request under Section 6227 if necessary. Therefore, a clerical error on the credit amount is allowed. Nonprofit entities will need to file an extension.

• Government entities, agencies, or instrumentalities will have a tax filing obligation to trigger direct pay. Entities without a tax filing obligation should make the direct pay election on Form 990-T, Exempt Organization Business Income Tax Return. Government entities not normally filing a return would default to a calendar year return, unless the entity has books and records to support a fiscal year filing.

• Specific for 2023, an applicable government entity filing Form 990-T solely to make an elective payment election, such as a state, the District of Columbia, or political subdivision or instrumentality or agency thereof (including The Tennessee Valley Authority; or an Indian tribal government), does not need to file Form 8868 to request an automatic extension of time to file Form 990-T. For 2023, a paperless automatic extension will be provided to each such entity that has registered its intention to make an elective payment election and has obtained one or more registration numbers.

• Entities receiving grants or loans can combine or stack different sources of funding. If an investment-related tax property (claiming credit) is funded by a tax-free grant or a forgivable loan, the entity gets the same value of IRA credit as if the investment were financed with taxable funds. The amount of credit plus restricted tax-exempt amounts, however, cannot exceed the total cost of the investment.

A separate release, Notice 2024-27, includes proposed regulations available for public comment through December 1, 2024 on the transferability of credits through “chaining” both a transfer with direct pay. Under the current guidance, a registration number can only be used once for either transfer or direct pay.

Please contact our Ryan tax professionals below for additional information on how these credits can impact your business. 

TECHNICAL INFORMATION CONTACTS: 

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

Scott Stogsdill
Director
Ryan
469.3994496
scott.stogsdill@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.