The Inflation Reduction Act of 2022 (IRA) established an array of tax incentives for investments in clean energy projects. It also created two new methods for monetizing some of these incentives.
The IRA’s elective payment provision allows tax-exempt organizations, states and their political subdivisions, and other governmental entities to receive certain tax credit benefits in the form of a cash payment from the Internal Revenue Service (IRS). This should be an efficient mechanism for tax-exempt organizations to realize incentives provided by 12 different energy credits. Taxable entities also can make direct payment elections with respect to three renewable energy credits. A similar direct payment election is available for the Advanced Manufacturing Investment Credit (AMIC) established by the CHIPS Act of 2022 (CHIPS Act).
The credit transfer provision allows taxable entities eligible for any of 11 different tax credits to transfer those credits to unrelated purchasers, without needing to resort to more complex and expensive tax credit syndications and partnership arrangements.
On June 14, 2023, the IRS and the Treasury Department issued Temporary Regulations establishing registration requirements for taxpayers intending to make the direct payment or credit transfer elections included in the IRA, or the direct payment election for the AMIC. On the same day, the IRS released three notices of proposed rulemaking that contain more extensive and substantive Proposed Regulations for these elections and published over 60 frequently asked questions and answers regarding the use of the elections.
The registration requirements are substantially similar across each of the elections. A taxpayer cannot make any of these elections until it has submitted the required information through an electronic portal to be established by the IRS and has obtained a separate registration number for each credit property for which it wants to make an election. The electronic portal is expected to be operational by the fall of 2023.
According to the guidance, the information taxpayers will be required to provide includes identifying information about the taxpayer and its green energy projects, including:
- type of entity, taxable year, and contact information
- information needed to establish the taxpayer’s eligibility (e.g., for direct payment elections under the IRA, evidence that the taxpayer is tax-exempt or a political subdivision of a state, etc.)
- type of annual return filed (or confirmation that the entity does not file annual returns with the IRS)
- type of credit(s) for which the taxpayer intends to make an election
- information identifying each credit property for which the taxpayer intends to make an election
- information concerning each such credit property, such as location, project type, required state or local permits, evidence of site control, start of construction date, and placement in service date
The guidance raises some questions about the registration process. The timeline for obtaining registration numbers is unknown at this time. In addition, the Proposed Regulations do not include many details about the information required with respect to the credit properties. Commenters on the Proposed Regulations may want more clarity on these issues.
The IRS intends to review the information submitted and issue a separate registration number for each credit property for which it has received sufficient information. Registration numbers will be effective for one taxable year, and if a taxpayer seeks to make an election for a taxable year after the taxable year for which a registration number is issued, the taxpayer must renew the registration, which will require attesting to the continued accuracy of the facts submitted previously, or updating those facts as needed.
Finally, completing the registration requirements and obtaining a registration number are necessary prerequisites to making an election, but receipt of a registration number does not mean the IRS has determined that a taxpayer is eligible to receive a direct payment or to claim or transfer any credit. It simply allows the taxpayer to include the election in its tax return.
The Temporary Regulations will be effective on the date they are published in the Federal Register, which is projected to be June 21, 2023, and will apply to taxable years ending on or after that date, until they expire on June 12, 2026. Comments on the Proposed Regulations are due by August 14, 2023. The Proposed Regulations include text identical to that included in the Temporary Regulations. So comments on and finalization of the Temporary Regulations will be addressed in the proposed rulemaking process.
If you have any questions concerning the Temporary Regulations, the Proposed Regulations, or credit transfer or direct payment options under the IRA or the CHIPS Act, please do not hesitate to contact John Dalton at 202-585-6504 or Megan Christensen at 202-585-6594.