Final regulations on direct pay provisions in IRA released by Feds

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TL/DR –

The U.S. Department of the Treasury and the Internal Revenue Service have released the final rules on the direct pay provisions included in the Inflation Reduction Act (IRA). The provisions aim to enable state, local, and tribal governments, as well as nonprofits and other entities, to access clean energy tax credits, which were previously inaccessible to many organizations. The Act also allows tax-exempt and government entities to apply the full value of tax credits for qualifying clean energy projects and enables businesses without sufficient tax liability to transfer clean energy credits to a third party for immediate funds.


U.S. Treasury and IRS Release Final Rules on IRA Direct Pay Provisions

The U.S. Department of the Treasury and Internal Revenue Service have disclosed final rules on direct pay provisions in the Inflation Reduction Act (IRA).

The tax credits, part of the Biden-Harris administration’s “Investing in America” initiative, will expedite the construction of projects affordably.

New credit delivery mechanisms in the IRA, such as elective pay, will enable state, local, and tribal governments, non-profit organizations, Puerto Rico, U.S. territories, and more, to leverage clean energy tax credits.

“The IRA’s new tools to access clean energy tax credits are a catalyst for meeting President Biden’s historic economic and climate goals,” said Treasury Secretary Janet L. Yellen.

The IRA permits tax-exempt and governmental entities to receive elective payments for 12 clean energy tax credits, including major Investment and Production Tax credits and tax credits for electric vehicles and charging stations.

“Local governments, nonprofits, and other non-taxable entities can now claim clean energy tax credits for the first time,” said John Podesta, Senior Advisor to the President for International Climate Policy.

The IRA also allows businesses to transfer clean energy credits to a third party in exchange for tax-free immediate funds, beneficial for entities without sufficient tax liability.

“The health and savings benefits of clean energy solutions transform all aspects of American life,” stated Secretary of Energy Jennifer Granholm.

The Treasury’s elective pay final rules provide certainty for entities to understand the law’s scope and requirements for eligibility.

A new Notice of Proposed Rulemaking (NPRM) issued by the Treasury aims to provide clarity and flexibility for entities that co-own clean energy projects.

Entities treated as partnerships for federal tax purposes are not eligible for elective pay under the IRA. However, the proposed elective pay regulations clarified that there are pathways for an applicable entity to access elective pay for credits it earns through a joint ownership arrangement.

The section 761(a) NPRM issued provides a broader pathway for entities co-owning renewable energy projects to elect out of partnership tax status and access elective pay.

The IRS has built the IRS Energy Credits Online (ECO) for recipients to complete the pre-file registration process and receive a registration number, ensuring that any entity that qualifies for these credit monetization mechanisms can access these benefits.

The American Council on Renewable Energy (ACORE) lauded the Treasury and IRS for their swift action to release the final rules.

“Today’s announcement helps provide the certainty needed to unleash new opportunities for state, local, and tribal governments, nonprofits, public power entities, and other tax-exempt parties that have been historically unable to access key federal incentives for clean energy,” said Ray Long, president and CEO of ACORE.

“Tax-exempt and government entities can now apply the full value of tax credits for building qualifying clean energy projects. Interest in this is already significant as over 1,000 projects have been submitted through the pre-filing registration process,” added Long.

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