How Did the IRA Change Elective and Direct Pay?
The Inflation Reduction Act of 2022 (IRA) created the ability for certain tax-exempt and other governmental entities to receive a payment for investments into property that would otherwise qualify for a credit against federal tax liability. These tax credits are specifically available for qualified clean energy investments as specified under the IRA, which includes properties like solar panels, battery storage systems, electric vehicles and electric vehicle charging stations.
IR-2024-61 Updates
On March 5, 2024, the U.S. Treasury Department issued IR-2024-61, the anticipated final regulations for its elective payment election or direct pay provisions under Internal Revenue Code (IRC) Section 6417. These regulations cover an entirely new regime of monetization in the federal tax realm. It is expected to continue to grow in popularity as entities previously unable to apply can now take advantage of getting direct payments from the federal government.
The final regulations replace earlier proposed ones but keep much of the original drafted rules in place. They did provide further guidance on several items that were not clear under IRC Section 6417, including:
- The direct pay election is available to applicable entities that own disregarded entities (DREs) for federal tax purposes in circumstances where the DRE separately owns the qualifying property.
- The direct pay election must be filed on an income tax return. The election cannot be made on an amended return, and no late election relief is available.
- Applicable entities do include the governing political subdivisions of the U.S. territories.
- In the event an applicable entity claims a tax credit greater than it was allowed to claim, the entity will owe a tax equal to the excess payment from the federal government. Additionally, the entity must show reasonable cause for making the claim. Otherwise, a penalty of 20% of the excess will be assessed.
- The regulations prohibit direct pay elections for tax credits transferred pursuant to IRC Section 6418 or otherwise not determined directly to the applicable entity or electing taxpayer. This is often referred to as chaining. The IRS also released Notice 2024-27, which requests comments on situations in which a direct pay election could be made for a tax credit purchased in a transfer. A part of the issue appears to be left open.
- The final regulations address some changes to a few highly technical issues around ordering rules in IRC Section 38 that affect the utilization of current-year credits eligible for direct pay, current-year credits not eligible for direct pay, and credit carryforwards.
Next Steps for Direct Pay Election Eligibility
The rules and regulations covering tax credit-eligible technologies and the direct pay election are voluminous and complex. Every renewable energy project for which the direct pay election could apply should be closely evaluated and reviewed regarding its eligibility.
Guiding You Forward
Cherry Bekaert’s Energy Tax Credits & Incentives Advisory group has a knowledgeable team available to help organizations take advantage of this great opportunity that direct pay offers.
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