Policy & Regulation

IRS launches free IRA and CHIPS pre-filing registration tool

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IRS launches free IRA and CHIPS pre-filing registration tool
(Image by Steve Buissinne from Pixabay)

It’s like grandpappy used to say, sitting in his Arizona room looking out on the old (solar) farm: a credit saved is a credit earned. Of course, grandpappy was talking nonsense; he had no clue how to effectively monetize renewable energy tax credits.

Enter our friends at the Internal Revenue Service, who are making it a little easier to turn those credits into cash by launching the free IRA/CHIPS Pre-filing Registration Tool. It allows qualifying businesses, tax-exempt organizations, or governing entities to take advantage of the elective payment or transfer of credits, even if they don’t have taxable income.

Elective payment and the ability to transfer create alternative ways for those entities and eligible taxpayers who have earned IRA or CHIPS credits to reap the benefits, even if they’re unable to use the credits to offset tax liability. In short, these advances allow businesses and governments to get creative when financing renewable energy projects.

The applying taxpayer must complete the pre-file registration process through the above link to receive a registration number. That magic number must then be included on the taxpayer’s annual return to make a valid election.

The IRS says the pre-filing registration request must be submitted no earlier than the beginning of the tax year in which the taxpayer will earn the credit it wishes to monetize with an elective payment election or transfer election. Even though registration is not possible before the beginning of the tax year in which the credit will be earned, the IRS recommends that taxpayers register as soon as reasonably practicable during the tax year. The current recommendation is to submit the pre-filing registration at least 120 days prior to when the organization or entity plans to file its tax return on which it will make its election. This should allow time for IRS review, and for the taxpayer to respond if the IRS requires additional information before issuing the registration numbers.

If the elective payment amount (combined with other tax payments and refundable credits) exceeds the taxpayer’s income tax liability, it will be treated as an overpayment of tax, which can be refunded or credited to the estimated tax for the following year.

GO DEEPER: Jose Zayas, EVP of Policy and Programs, American Council on Renewable Energy joined the Factor This! podcast to break down the key components of the historic Inflation Reduction Act, which includes $369 billion dedicated to clean energy and climate change.

The Inflation Reduction Act and the Creating Helpful Incentives to Produce Semiconductors Act, known on websites like this one as IRA and CHIPS, allow taxpayers to take advantage of certain manufacturing investments, clean energy investments, and production tax credits through elective pay or transfer. The idea behind the legislation is to encourage domestic renewable energy manufacturing, almost ensuring an investment into carbon reduction will qualify for some type of credit.

In June 2023, the Treasury Department issued guidance for direct pay and clean energy tax credit transferability provisions under the Inflation Reduction Act. After Dec. 31, 2022, applicable entities could choose to make an elective payment election, which treats certain credits as a payment against their federal income tax liabilities rather than as a nonrefundable credit. This payment will first offset any tax liability held by the entity and any excess will be refundable.

These “applicable entities” generally include tax-exempt organizations, state and local governments, Indian tribal governments, Alaska Native Corporations, the Tennessee Valley Authority, and rural electric cooperatives. All other taxpayers may elect to be treated as an applicable entity for a limited number of credits.

For tax years beginning after Dec. 31, 2022, certain eligible taxpayers (generally taxpayers that are not applicable entities, you know who you are) can make an election to transfer all or a portion of an eligible credit to unrelated taxpayers for cash payments. The unrelated taxpayers (sounds like a sick ska band name) are then allowed to claim the transferred credits on their tax returns. The cash payments are not included in the gross income of the eligible taxpayer and are not deductible by those unrelated taxpayers.

Taxpayers who intend to make an elective payment or credit transfer election must earn the credit, which means they must make a tax credit investment or undertake tax credit production activities to earn a credit that qualifies for the elective payment election or can be transferred.