The Treasury Department and the IRS released final regulations to assist certain entities co-owning clean energy projects access clean energy tax credits via elective pay (also commonly referred to as direct pay). The guidance offers greater clarity for direct pay eligible entities that want to jointly invest in clean energy projects.  

“The Biden-Harris Administration is focused on continuing the clean energy investment boom and ensuring all Americans benefit from the growth of this sector. Direct pay is helping more clean energy projects be built quickly and affordably, and American communities are benefitting as a result. Today’s rules will increase the availability of capital for clean energy projects by providing certainty and flexibility for state and local governments, Tribes and territories, non-profits, and more to benefit from these resources,” noted U.S. Deputy Secretary of the Treasury Wally Adeyemo in a release. 

Before the Inflation Reduction Act, entities currently eligible for elective pay cannot benefit from clean energy tax credits because they had little or no federal tax liability. Elective pay allows eligible entities and organizations access to the full value of clean energy incentives by making certain clean energy credits refundable. These entities include state and local governments, tribal entities, public school districts, rural electric co-ops and tax-exempt organizations, such as churches, hospitals, higher education institutions and non-profits, explained the IRS. 

The final regulations offer greater clarity and flexibility for elective pay-eligible entities that desire to jointly invest in clean energy projects. An examples is a tax-exempt entity co-investing in a clean energy project with a for-profit developer, or multiple tax-exempt entities or governments co-investing in clean energy projects. Particularly, these final regulations make targeted modifications to existing partnership tax rules clarifying how co-owned clean energy projects can elect not to be treated as partnerships for tax purposes and providing such projects additional flexibility. 

Generally, partnerships are not eligible for elective pay. But, by collectively electing out of partnership status, co-owners that are eligible for elective pay will be able to take advantage of elective pay for the share of the project that they own while co-owners that are not eligible for elective pay can utilize or take advantage of the transferability rules to transfer their share of the credits from the project. 

Responding to comments received, the final regulations clarify that eligible co-ownership arrangements can be organized to own and operate property, giving rise to any of the clean energy tax credits for when elective pay is available. The regulations also allow these arrangements to invest in clean energy projects via a noncorporate entity, such as a limited liability company. 

Additionally, the Treasury and IRS also released proposed regulations  providing added administrative requirements for unincorporated organizations that opt out of partnership treatment under the modified rules. Before the proposed regulations are finalized, the IRS will take into account comments about the notice of proposed rulemaking.