Treasury Proposes Elective Payment Regulations

On June 14, 2023 Treasury released proposed regulations on the process for tax-exempt entities, such as Native American tribes, rural energy cooperatives, state and local governments, and other tax-exempt entities, to utilize elective payment, also called direct pay, to receive cash payment for 11 clean energy tax credits. The elective pay option, created by IRA section 13801, allows tax-exempt entities to receive the full value of tax credits through cash payment, even though they do not have federal tax liability. Treasury clarified that nonprofit entities, including government entities such as school districts, public utility districts and state universities, would be eligible to directly receive cash payments for tax credits on qualifying clean energy investments.

For tax-exempt entities, direct pay may be used on 11 of the 19 clean energy tax credits, including the IRC sections 45 and 48 PTC and ITC. For businesses, direct pay is available only for the tax credits under IRC sections 45Q for carbon capture and sequestration, 45V for clean hydrogen, and 45X for advanced manufacturing.

Treasury also released a temporary rule on the same day, providing an online pre-filing process for project owners seeking to use direct pay. Before owners file tax returns, they must register their clean energy investments through an IRS online portal, which will generate a registration number that they will place on their tax returns. This pre-filing process is meant to reduce fraudulent claims as well as speed up the processing of tax returns and the issuance of payments.

Treasury requests public comment on the proposed rule through August 14, 2023 and will hold a public hearing on August 21, 2023.

Treasury also released a tribal fact sheet on elective pay, general FAQs, and an elective pay landing page.