Monetizing IRA clean energy tax credits

Direct pay election for tax exempts, governments, and other entities

The new Section 6417 allows applicable entities to elect to make eligible credits refundable, allowing direct payment of the credit. Designed to primarily incentivize entities that normally do not benefit from nonrefundable clean energy tax credits, the direct payment option is available to certain types of entities by making a direct pay election. Once made, the direct pay election is not revocable. Section 6417 includes an additional tax on excessive claims.

Applicable entities include tax-exempt entities, any state or political subdivision of a state, the Tennessee Valley Authority, American Indian tribal governments, any Alaska Native corporation, and any corporate rural electric energy cooperative. Special rules apply in the case of facilities or properties held directly by a partnership or an S corporation.

Direct pay might be available for entities that do not qualify as applicable entities in the case of the carbon capture and sequestration credit under Section 45Q, the clean hydrogen tax credit under Section 45V, and the advanced energy production credit under Section 45X. However, taxpayers considering making the election under this limited provision should carefully weigh the benefit of electing to treat the credit as a refundable tax credit against the consequences of making such an election, such as the fact that credits no longer are transferrable under Section 6418 and requirements for making the election in succeeding years.

The direct pay election is available for the following applicable clean energy tax credits:

Section 30C – Alternative fuel vehicle refueling property tax credit
Section 45 – Renewable electricity production tax credit
Section 45Q – Carbon capture and sequestration tax credit
Section 45U – Zero emissions nuclear power tax credit
Section 45V – Clean hydrogen tax credit
Section 45W – Qualified commercial clean vehicle tax credit
Section 45X – Advanced manufacturing production tax credit
Section 45Y – Clean electricity production tax credit
Section 45Z – Clean fuel production tax credit
Section 48 – Energy credit
Section 48C – Advanced energy project tax credit
Section 48E – Clean electricity investment tax credit

Transferability of clean energy tax credits

Except when direct pay is elected under Section 6417, Section 6418 allows an eligible taxpayer (transferor) to elect to transfer all or any part of a tax credit to an unrelated taxpayer (transferee) in exchange for a cash payment. The transferee is treated as the taxpayer for purposes of claiming the credit, and the cash payment is not included in the gross income of the transferor and is not deductible by the transferee.

All of the tax credits eligible for direct pay, except the qualified commercial clean vehicle credit under Section 45W, are eligible for transfer under Section 6418. Eligible credits do not include credit carrybacks or carryforwards. An eligible taxpayer for purposes of Section 6418 is a taxpayer that is not an applicable taxpayer under Section 6417. Special rules apply in the case of facilities or properties held directly by a partnership or an S corporation. In addition, the secretary of the U.S. Department of the Treasury is permitted to prescribe reporting or registration rules to prevent duplication, fraud, improper payments, or excessive payments. Section 6418 also includes an additional tax on excessive claims.

Looking ahead

Taxpayers should review the new clean energy tax credits with their tax advisers to determine if they are eligible for options to monetize them under direct pay or by transferring the credits to an unrelated third party. In addition, these options provide significant opportunities for equity financing of clean energy projects, although many questions remain about how these tax credits and options to monetize them will work in the case of pass-through vehicles typically used for this kind of funding. Treasury and the IRS have said that they are working on guidance, but it likely will be a while before all questions are answered. In the meantime, project organizers and investors should work closely with their tax advisers to evaluate how decisions about structuring an investment vehicle will affect the ability to monetize clean energy tax credits.