New Clean Energy Tax Credits to Allow Direct Pay Benefits to Governments and Non-Profits

New Clean Energy Tax Credits to Allow Direct Pay Benefits to Governments and Non-Profits

The Internal Revenue Service (IRS) recently released new Inflation Reduction Act (IRA) provisions that will expand the benefits of clean energy tax credits and incentivize clean energy construction projects. The IRA created two new credit delivery mechanisms–elective pay (otherwise known as “direct pay”) and transferability–to enable state and local governments, non-profit businesses, and tax-exempt organizations to take advantage of clean energy tax credits.

Previously, ineligible taxpayers like municipalities could only partially benefit from clean energy incentives, as they were not subject to federal taxation. Starting in Tax Year 2023, local governments will be allowed to treat the energy credit’s amount as a tax payment and refund any resulting overpayment. For example, a local government that makes a clean energy investment that qualifies for an investment tax credit can file an annual tax return with the IRS to claim direct pay for the full value of the investment tax credit, as long as it meets all of the IRS requirements.

The following tax credit categories are applicable for direct payment:

Energy Credit (48), (Form 3468, Part VI)
Clean Electricity Investment Credit (48E), (Form 3468, Part V)
Renewable Electricity Production Credit (45), (Form 8835, Part II)
Clean Electricity Production Credit (45Y)
Commercial Clean Vehicle Credit (45W), (Form 8936, Part V)
Zero-emission Nuclear Power Production Credit (45U), (Form 7213, Part II)
Advanced Manufacturing Production Credit (45X), (Form 7207)
Clean Hydrogen Production Credit (45V), (Form 7210)
Clean Fuel Production Credit (45Z)
Carbon Oxide Sequestration Credit (45Q), (Form 8933)
Credit for Alternative Fuel Vehicle Refueling / Recharging Property (30C), (Part 8911, Part II)
Qualifying Advanced Energy Project Credit (48C), (Form 3468, Part III)

A special provision in the direct pay’s proposed rule would allow tax-exempt and government entities to leverage other sources of funds for their clean energy projects if they claim investment-related credits. All interested entities must first complete a mandatory IRS pre-filing registration process online.