Holland & Knight LLP Finalizes Direct Pay Rules for Inflation Reduction Act

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TL/DR –

The U.S. Treasury and IRS have released final regulations under Section 6417 of the Internal Revenue Code, allowing taxpayers to choose to receive direct payment instead of a tax credit. The regulations apply to entities generally exempt from federal income tax and can be used for 12 of the Inflation Reduction Act’s tax credits. The new regulations provide clarity on the rules and procedures for electing direct payment and apply to taxable years ending on or after March 11, 2024, with options for taxpayers for years ending before this date.


U.S. Treasury and IRS Release Final Regulations Under Section 6417 of the Internal Revenue Code

Final regulations under Section 6417 of the Internal Revenue Code, introduced by the Inflation Reduction Act (IRA), have been released by the U.S. Department of the Treasury and IRS. This allows specific taxpayers, typically entities exempt from federal income tax, to opt for a direct payment in place of a tax credit. These payments concern 12 of the IRA’s tax credits.

“Electing taxpayers” who are not considered applicable entities can also request direct payment, but this only pertains to tax credits under Sections 45V, 45Q and 45X, and part of the credit eligibility period. The tax credit is seen as a payment against tax liability, allowing the entity or electing taxpayer to get a cash payment.

The final regulations provide clarity on the rules and procedures for opting for direct payment, applying to taxable years ending on or after March 11, 2024. For taxable years ending before this date, the proposed regulations may be applied by taxpayers, given they apply the proposed rules entirely and consistently.

Simultaneously, the Treasury Department and IRS issued additional proposed regulations and Notice 2024-27. This concerns direct payment for partnerships and other unincorporated organizations, and whether a taxpayer who acquires tax credits transferred under Section 6417 can seek direct payment for the same transferred tax credits. This represents a significant departure from previous positions.

Expanded Eligibility for Direct Payment of Tax Credits

The final regulations have slightly modified the proposed regulations, expanding the range of entities eligible for direct payment of tax credits. For example, regulations confirmed that tribal corporations included under specific sections of the Indian Reorganization Act of 1934 or the Oklahoma Indian Welfare Act are disregarded entities relating to credits. There are also special rules in place regarding mirror-code territories, with implications for Guam, the U.S. Virgin Islands, and North Mariana Islands.

Further Guidance on Eligible Entities

The final regulations give guidance on partnerships and S corporations, indicating conditions under which they can be treated as “applicable entities” for the limited purpose of making an elective payment election with respect to certain tax credits. The Treasury Department and IRS also issued proposed regulations under Section 761, offering additional advice for unincorporated organizations that have applicable entities as owners.

Procedural Rules for Direct Payment

The final regulations also detail the procedural rules for seeking direct payment, specifying due dates for making the elective payment election which vary depending on the type of taxpayer.

Elective Payment Election Rules

The regulations provide guidance on when an entity that isn’t an applicable entity can be treated as one for the limited purpose of seeking direct payment, only available with respect to tax credits under Sections 45V, 45Q and 45X for part of the credit eligibility period.

Pre-Filing Registration and Election Logistics

To receive direct payment, eligible entities must make an elective payment election on annual federal income tax returns or using Form 990-T and must pre-register with the IRS portal. Each credit property requires its own registration number.

Special Enforcement Matters

The final regulations maintain that the elective payment election is a “special enforcement matter” for purposes of the centralized partnership audit regime pursuant to Section 6241(11), subject to special rules for effective and efficient enforcement.

Additional Regulations and Notices

The IRS issued Notice 2024-27 requesting comments on situations where an elective payment election could be made for a credit transferred under Section 6418, referred to as “chaining”.

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