New guidance on energy tax credit transferability and direct pay
The IRS has released new guidance on key provisions in the Inflation Reduction Act, expanding access to clean energy tax credit opportunities.
Previously, only for-profit entities that filed federal income tax were able to claim energy credits. The new guidance now allows tax-exempt entities — such as nonprofits, tribal governments and schools — to benefit from their clean energy and sustainability efforts.
Your tax-exempt organization may now be able to claim credits through two different methods: direct pay and transferability.
Direct pay
Elective, or direct, pay allows applicable entities to receive clean energy credits in the form of direct payments from the IRS.
According to the IRS, “applicable entities include tax-exempt organizations, States, and political subdivisions such as local governments, Indian tribal governments, Alaska Native Corporations, the Tennessee Valley Authority, rural electric co-operatives, U.S. territories and their political subdivisions, and agencies and instrumentalities of state, local, tribal, and U.S. territorial governments.”
The credits available for direct pay are:
- Clean electricity investment credit (48E)
- Energy credit (48)
- Commercial clean vehicle credit (45W)
- Clean electricity production credit (45Y)
- Renewable electricity production credit (45)
- Advanced manufacturing production credit (45X)
- Clean fuel production credit (45Z)
- Zero-emission nuclear power production credit (45U)
- Qualified advanced energy project credit (48C)
- Clean hydrogen production credit (45V)
- Alternative fuel vehicle refueling property credit (30C)
- Carbon oxide sequestration credit (45Q)
In most cases, to qualify for direct payments, you must have sole ownership of the eligible property.
However, a partner or S corporation shareholder may qualify under the advanced manufacturing production credit, the carbon oxide sequestration credit or the clean hydrogen production credit. For these credits, partnerships or S corporations can make a direct pay election if they qualify as an electing taxpayer.
To make a direct payment election, you will need to complete the electronic pre-filing registration process. This will provide you with a registration number for each eligible credit, which must be included in your tax return.
Pre-filing is required for a direct payment election; however, it does not guarantee eligibility for the credit. You will still need to establish eligibility on your tax return.
Transferability
Transferability allows entities that aren’t eligible for direct pay to sell their tax credits for cash.
Transferable credits include:
- Clean electricity investment credit (48E)
- Energy credit (48)
- Clean electricity production credit (45Y)
- Renewable electricity production credit (45)
- Advanced manufacturing production credit (45X)
- Clean fuel production credit (45Z)
- Zero-emission nuclear power production credit (45U)
- Qualified advanced energy project credit (48C)
- Clean hydrogen production credit (45V)
- Alternative fuel vehicle refueling property credit (30C)
- Carbon oxide sequestration credit (45Q)
You can choose to sell all or just a portion of an eligible credit. However, bonus credits cannot be transferred separately from their related credits. A single credit can also be sold to multiple, unrelated parties.
If you’re interested in using transferability on an eligible project, you’ll need to complete the IRS’s electronic pre-filing registration. Filing provides you with a registration number for each project that buyers can use to claim the credits.
Additional information about the pre-filing process is expected to be released later in 2023.
What it means for your organization
The new guidance is meant to help expand accessibility for energy credits and further incentivize green initiatives. The Department of the Treasury also intends for it to “help build projects more quickly and affordably, which will create good-paying jobs, lower energy costs for families, and advance American innovation.”
For your tax-exempt or government organization, the direct impact can be seen on your bottom line. Direct payments or transferability provide a new source of revenue from the clean energy projects you’re already supporting. They also open a potential avenue for financing any future projects.
How Wipfli can help
Wipfli is ready to help you get the most from your sustainability efforts. Our dedicated energy credit team can help you navigate tax strategies and the complex regulations surrounding energy credits. And we keep you updated on new guidance so that you can stay confident in your plan despite the ever-changing tax landscape.
Contact us today to learn more about how we can help your organization maximize your benefits.
Sign up to receive additional tax information in your inbox or continue reading:
