Feds Release Final Rules on Clean Energy Tax Credits

Renewable energy project developers now have important clarification about the transferability of clean energy tax credits, as the U.S. Treasury Dept. and the Internal Revenue Service (IRS) released final rules on the issue on April 26.

The Inflation Reduction Act (IRA) passed in 2022 created two new credit delivery mechanisms—so-called elective pay or direct pay, and transferability—to enable a variety of government and business entities to take advantage of tax credits tied to renewable energy projects. Groups such as state, local, and Tribal governments, along with non-profit organizations and some businesses, until passage of the IRA had not been able to fully benefit from tax credits related to development of clean energy installations.

The groups had sought clarification on the tax credit issue before moving forward with some projects. Organizations have said that transferability will help them build new projects more quickly and affordably. The topic was a focus of discussion at the Solar Energy Industries Association’s (SEIA’s) March 2024 “Finance, Tax and Buyers Seminar” in New York City.

New Tools for Access to Credits

“The Inflation Reduction Act’s new tools to access clean energy tax credits are a catalyst for meeting President Biden’s historic economic and climate goals. They are acting as a force multiplier, enabling companies to realize far greater value from incentives to deploy new clean power and manufacture clean energy components,” said Secretary of the Treasury Janet Yellen. “More clean energy projects are being built quickly and affordably, and more communities are benefiting from the growth of the clean energy economy.”

The IRA’s transferability provisions allow businesses to transfer all or a portion of any of 11 clean energy credits to a third-party in exchange for tax-free immediate funds. That will enable businesses to take advantage of tax incentives if they do not have sufficient tax liability to fully utilize the credits themselves. Entities without sufficient tax liability have previously been unable to realize the full value of credits, which often raised costs and created challenges when trying to finance construction.

“Thanks to President Biden’s Inflation Reduction Act, more small businesses, startups, and other businesses can now benefit from game-changing clean energy tax credits by using the innovative transferability tool,” said Lael Brainard, White House National Economic Advisor. “We are already seeing businesses eager to participate in the transfer market, with more than 50,000 registration numbers requested for projects or facilities pursuing transferability. These final rules will provide additional clarity and certainty for clean energy investments in communities across the country.”

Payments for Credits

The IRA also allows tax-exempt and government agencies to receive elective payments for 12 clean energy tax credits, including the major Investment and Production Tax Credits, as well as tax credits for electric vehicles and charging stations. Businesses can also choose elective pay for a five-year period for three of those credits: the credits for Advanced Manufacturing (45X), Carbon Oxide Sequestration (45Q), and Clean Hydrogen (45V). Final rules on elective pay were issued in March.

The IRS has created an Energy Credits Online, or ECO, system that will support taxpayers transferring a clean energy credit, or receiving a direct payment of an energy credit, or CHIPS credit. CHIPS is a program to provide incentives for production of semiconductors, which have many applications in the energy industry.

The IRS in a news release Friday said the registration number from its online system “must be included on the taxpayer’s annual return when making a transfer election or elective payment election for a clean energy credit. The registration process helps prevent improper payments to fraudulent actors and provides the IRS with basic information to ensure that any taxpayer that qualifies for these credit monetization mechanisms can readily access these benefits upon filing a return and making an election.”

The agency said that as of April 19 more than 900 entities have requested about 59,000 registration numbers for projects or facilities located across all 50 states plus territories. “Approximately 97% of these projects are pursuing transferability,” the agency said, adding that “a wide variety of credits are being used, but the bulk transferability-related registrations are related to solar and wind projects using the investment or production tax credit. In addition, more than 1,300 projects or facilities submitted are pursuing elective pay, including submissions from more than 75 state and local governments to register approximately 650 clean buses and vehicles through elective pay.”

The value of the tax credits for clean energy projects is not determined during the pre-filing registration process; it is determined after an entity files its tax return.

Darrell Proctor is a senior associate editor for POWER (@POWERmagazine).

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