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.

It’s often easier (and less expensive) for a business to classify its workers as independent contractors. However, the IRS is aware of this, and in recent years, has increased its emphasis on ensuring that employers are properly classifying their workers. Businesses that are misclassifying employees may be at an increased risk of audit.

Below, you’ll find a few of the top questions from a recent webinar on the topic and their accompanying answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.   

Q: How quickly does the Form SS-8 get turned around, and how should an employer pay the employee or contractor in the interim?

A: The IRS states it can take up to six months for a determination. Importantly, this determination does not necessarily reduce any current or prior tax liability. If the employment status differs from what was expected, the IRS may require amended returns.

Q: How many years back can you file a Form SS-8?

A: The IRS will only issue determinations based on Form SS-8 for tax years that are still open. Typically, this period is the latter of three years from the date the original return was filed or two years from the date the tax was paid.

Q: Where can you find the Department of Labor’s independent contractor rules?

A: You can access the Department of Labor’s announcement of the new final rule, including links to the rule, an FAQ, and a small entity compliance guide.

Q: Can you appeal a Form SS-8 determination?

A: An IRS determination on Form SS-8 is final, and there is no formal appeal within the agency. However, if you disagree, you can provide additional information or highlight facts from your original submission that you believe were not adequately considered and request a reconsideration.

To learn more about classifying a taxpayer as employee or contractor, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial.

Question: Sherri and Chris were talking about year-end tax savings when Chris mentioned that she has a Health Savings Account (HSA) in conjunction with the high deductible health plan (HDHP) offered by her employer. Of her 2024 $4,150 maximum allowable contribution, she has thus far only contributed $2,150 through payroll deductions. Now, in November, she has extra cash in hand and regrets her earlier annual election amount. Sherri says, “I have a remedy for that, Chris. You can contribute to the HSA from out-of-pocket, rather than through wages, and get a tax deduction if you contribute before April 15, 2025.” Is Sherri correct?

Answer: Yes, as an eligible individual for the entire tax year, Chris can contribute the additional $2,000 shortfall to reach the $4,150 maximum for 2024. Anyone can contribute to an eligible individual’s HSA. For an employee’s HSA, the employee, employer or both may contribute to the employee’s HSA in the same year.

Using Part I of Form 8889, Health Savings Accounts (HSAs), to figure the deduction, Chris will ultimately realize the deduction amount on Schedule 1 (Form 1040), Part II Line 13, if contributed before April 15, 2025.