Overview of Treasury and IRS final regulations on clean energy tax credits

The Department of the Treasury and the Internal Revenue Service (IRS) have issued final regulations regarding elective pay, also known as direct pay, which allow eligible entities to claim refundable clean energy tax credits. These regulations, effective Jan. 19, 2025, also include proposed administrative requirements for unincorporated organizations opting out of partnership treatment.

What is elective pay?

Elective pay is a provision introduced under the Inflation Reduction Act that enables entities with little or no federal tax liability to access refundable clean energy tax credits. These credits were previously unavailable to certain entities due to their tax-exempt status.

• Entities eligible for elective pay include:
• State and local governments
• Tribal entities
• Public school districts
• Rural electric cooperatives
• Tax-exempt organizations, such as churches, hospitals, and universities

Key changes in the final regulations

The new regulations provide clarity and flexibility for eligible entities, particularly in how co-owners of clean energy projects may access and utilize clean energy tax credits. The key updates include:

• Partnership tax rules adjustments: Partnerships are not eligible for elective pay. However, co-owners of clean energy projects may elect out of partnership treatment. This allows eligible co-owners to claim elective pay for their share of credits, while ineligible co-owners can transfer their credits through transferability rules.
• Increased investment options: Eligible entities can co-invest in clean energy projects through non-corporate entities, such as limited liability companies (LLCs).
• Clarified administrative processes: Reporting and compliance requirements for accessing credits have been clarified to ensure consistent application and adherence to regulations.

Proposed administrative requirements

Treasury and the IRS have also proposed additional administrative requirements for unincorporated organizations electing out of partnership treatment under the new rules. These proposed requirements aim to provide further guidance on eligibility and compliance. Stakeholders are invited to submit comments on these proposals before they are finalized.

Effective date

The final regulations will apply to tax years ending on or after Jan. 19, 2025. Eligible entities planning to utilize elective pay should familiarize themselves with the updated requirements to ensure compliance with the new framework.