IRS finalizes rules on elective payments of certain clean energy credits under the Inflation Reduction Act

The Department of the Treasury and Internal Revenue Service issued final regulations for applicable entities that earn certain clean energy credits and choose to make an elective payment election.

For tax years beginning after Dec. 31, 2022, applicable entities can choose to make an elective payment election, which will treat certain clean energy credits as a payment against their federal income tax liabilities rather than as a nonrefundable credit. This payment will first offset any income tax liability of the applicable entity and any excess is refunded to the applicable entity.

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. Electing taxpayers, which includes other taxpayers, may elect to be treated as an applicable entity for a limited number of credits.

Previously, the IRS issued proposed regulations for the elective payment of applicable credits and temporary regulations that provide rules for the mandatory IRS pre-filing registration process through the Inflation Reduction Act (IRA) and CHIPS Act of 2022 (CHIPS) pre-filing registration tool.

For detailed instructions on how to use the tool, refer to Publication 5884, Inflation Reduction Act (IRA) and CHIPS Act of 2022 (CHIPS) Pre-Filing Registration Tool -- User Guide and Instructions.

The IRS also updated the elective payment frequently asked questions based on the final regulations.

The pre-filing registration process must be completed, and a registration number received, prior to making an elective payment election.

Proposed regulations were also issued today regarding elections by certain unincorporated organizations that are owned by one or more applicable entities to be excluded from the application of the partnership tax rules. These proposed regulations would provide certain exceptions to the existing regulations for certain unincorporated organizations with one or more applicable entities and would allow such entities to make an elective payment election.

Finally, the IRS issued Notice 2024-27 that requests additional comments on any situations in which an elective payment election could be made for a clean energy credit that was purchased in a transfer, which is referred to as chaining.