In June, the U.S. Department of the Treasury and the IRS released guidance on the clean energy tax credits enacted by the IRA, including proposed regulations under Section 6417 for the direct payment election, temporary regulations on prefiling registration, and FAQ.
Background
Section 6417 allows applicable entities, such as tax-exempt organizations and certain government entities, to elect to receive direct payment of the applicable energy tax credits without regard to taxable income. The precise effective date differs for each applicable energy tax credit, but the credits generally are effective for property placed in service for taxable years beginning after Dec. 31, 2022.
Under Section 6417(a), an applicable entity can make an election to treat the amount of an applicable energy tax credit to which it is entitled as a refundable payment of income tax for the taxable year of the credit. Special rules apply for partnerships and S corporations. Under Section 6417(d)(4), the payment generally is treated as made by the IRS to the applicable entity on the unextended due date of the return (or in the case of government entities not required to file a return, the date a return would have been due if the entity was required to file a return).
Section 6417(d)(6) provides that in the absence of reasonable cause, if the IRS determines that it has made an excessive payment, the amount of the excessive payment is treated as an addition to income tax under Chapter 1 of the IRC regardless of whether the entity pays such a tax.
Section 6417(d)(5) provides that “as a condition of, and prior to [making the direct pay election], the Secretary may require such information or registration as the Secretary deems necessary for purposes of preventing duplication, fraud, improper payments, or excessive payments under this section.”
Under Section 6417(d)(3)(A), subject to special rules for certain credits, the election must be made by the due date of the tax-exempt entity’s return (including extension), but in no event earlier than 180 days after date of enactment of the IRA. Government entities not required to file a return must make the election on a date set forth by the Treasury secretary.
Crowe observation
Entities that are not applicable entities might be eligible for direct payment of credits under Section 45Q, Section 45V, and Section 45X.
Prefiling registration and election
The proposed Section 6417 regulations provide rules describing which taxpayers are eligible to make the direct payment election, including how the rules work in the case of multiple owners and owners that are disregarded entities, partnerships, and S corporations. The proposed regulations also provide that the direct payment election can be made only on an original return and that no relief for late elections is available.
Additionally, the proposed regulations provide that the election is due by the extended due date of the taxpayer’s annual return, with rules for entities that do not have an IRS return filing obligation, such as taxpayers located in U.S. territories and certain governmental entities, and for short-year filers. The proposed regulations also provide rules for the IRS to collect excessive payments.
FAQ 20 clarifies that the annual return is the return taxpayers who have an IRS filing obligation normally file, including Form 1065, “U.S. Return of Partnership Income,” for partnerships or Form 990-T, “Exempt Organization Business Income Tax Return (and Proxy Tax Under Section 6033(e)),” for organizations with unrelated business income or a proxy tax. Taxpayers not required to file an annual return because, for instance, they are located in a U.S. territory, should file the annual return they would be required to file if they had an IRS filing obligation. For taxpayers not otherwise covered by these rules, like state and local governments, the annual return is the Form 990-T. Short-year filers’ annual return is the short-year return.
Temporary regulations
The temporary regulations are effective immediately and provide registration requirements that must be completed before an applicable entity can make a direct payment election. The regulations caution that receipt of a registration number does not mean that the taxpayer is eligible to receive the direct payment.
Crowe observation
Prefiling registration is also required for the election to transfer credits under Section 6418, an election not available to entities eligible to make the direct payment election.
Following are other highlights of the temporary regulations:
- The prefiling registration process must be completed electronically.
- Each applicable credit project must have its own registration number.
- The registration number must be included on the return on which the direct pay election is made.
- Information required to be submitted with the registration includes information about the taxpayer, the credit being claimed, the property to which the credit relates, and a contact authorized to act on behalf of the applicant.
- The registration application must be signed under penalty of perjury.
- The registration number is valid for one year. If the same credit is being claimed with respect to the same property in another year, the registration number must be renewed. If there are changes to specified information (such as the name and EIN of an owner due to a reorganization), the registration must be amended or, in some cases, a new registration is required.
Looking ahead
According to the FAQ, the electronic registration portal is expected to be open by the end of 2023. Taxpayers who intend to make a direct pay election for 2023 should consult with their tax advisers to determine eligibility. They also should begin gathering the required registration information so they are ready when the portal opens.
