TL/DR –
The U.S. Department of the Treasury and the Internal Revenue Service (IRS) have issued final regulations for the elective pay mechanism of the Inflation Reduction Act, which allows counties and other tax-exempt entities to monetize certain clean energy tax credits. The final regulations provide clarity on the pre-filing registration process, adopting a tax year for filing purposes, and combining grants and loans with tax credits. The Treasury also introduced a new proposed rule to establish criteria for the eligibility of certain ownership structures to claim elective pay.
IRS and Treasury Issued Final Regulations on Elective Payments of Clean Energy Credits
The U.S. Department of the Treasury and the Internal Revenue Service (IRS) issued final regulations on March 5 for the elective pay mechanism set by the Inflation Reduction Act (IRA). This allows counties and other exempt entities to convert inaccessible clean energy tax credits into direct pay due to lack of tax liability.
These regulations resemble those proposed in June 2023, but with added clarity on the elective pay election process, involving the pre-filing registration process, tax year adoption for filing, and combining grants with tax credits. A new proposed rule that provides eligibility criteria for ownership structures to claim elective pay was also revealed.
Pre-Filing Registration
Final regulations necessitate pre-filing registration for counties making an elective payment election. Requirements for registration include the manner of pre-filing, timing, and essential information for completion. Access the Pre-Filing Registration Tool here and User Guide here.
Tax Year Determination
Counties can determine their taxable year for elective pay elections using a calendar or fiscal year. File an initial Form 990-T to adopt a taxable year. Access Form 990-T here.
Grants & Loans
Final regulations verify that counties can combine tax-free grants and forgivable loans with elective pay to fund clean energy projects. The full credit amount will be received if the direct payment amount combined with the grant or loan does not exceed the total project cost.
Ownership Structures
Alongside the final regulations, the IRS and Treasury released an NPRM on co-ownership arrangements. The rule offers clarification on elective pay treatment for county co-ownership of eligible credit property. However, partnerships themselves are ineligible to receive elective pay. Counties that co-own credit property can receive elective pay for their share of the property if they “elect out” of partnership tax treatment. The proposed rule also adds exceptions to the “elect out” requirement for co-ownership arrangements. Public comments on this proposed rule can be submitted on regulations.gov until May 10, 2024.
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