Treasury issues IRA guidance on direct pay, transferability
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Treasury issues IRA guidance on direct pay, transferability

The Treasury Department has issued guidance for direct pay and clean energy tax credit transferability provisions under the Inflation Reduction Act.

The federal government is in the midst of implementing the historic legislation, which devotes nearly $400 billion to clean energy and climate change mitigation. The arduous process has left project developers and manufacturers anxiously waiting before making investments.

Treasury has already shared guidance on electric vehicle tax credits, energy communities, and domestic content.

The Internal Revenue Service issued proposed regulations June 14 describing rules for applicable entities that earn certain clean energy credits and choose to make an elective payment election and rules for eligible taxpayers that elect to transfer certain credits to unrelated parties.

For tax years beginning after Dec. 31, 2022, applicable entities can choose to make an elective payment election, which will treat 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 of the entity and any excess will be refundable.

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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.

Also, for tax years beginning after Dec. 31, 2022, certain eligible taxpayers (generally taxpayers that are not applicable entities) can make an election to transfer all or a portion of an eligible credit to unrelated taxpayers for cash payments.

The unrelated taxpayers are then allowed to claim the transferred credits on their tax return. The cash payments are not included in gross income of the eligible taxpayer and are not deductible by the unrelated taxpayers.

Temporary regulations were also issued, providing rules that relate to a mandatory IRS pre-filing registration process, which will be through an electronic portal. The pre-filing registration process must be completed, and a registration number received, prior to making an elective payment election or an election to transfer eligible credits.

The process also applies prior to making an elective payment election related to advanced manufacturing investment credit amounts under the CHIPS Act of 2022. Proposed regulations were also issued today describing other issues related to the advanced manufacturing investment credit.