Tax-exempt entities direct pay opportunities

General

The IRA allows tax-exempt entities—such as municipalities, state governments, and non-profits—to receive direct payments equivalent to the value of energy tax credits, helping offset project costs. This provision applies to clean energy projects commissioned after 2022 and is available under 12 IRA tax provisions.  

There are two mechanisms for these refundable payments—elective pay (otherwise known as “direct pay”) - that will help tax-exempt entities to access these credits.

Elective pay makes certain clean energy tax credits and the CHIPs manufacturing credit effectively refundable (see Elective pay and transferability frequently asked questions). The entity can receive the full value of the credit because the IRS treats the elective payment amount as a tax payment. In other words, the IRS counts it as overpayment on the return and refunds the value to the entity. Elective pay is sometimes also known as "direct pay," which shouldn't be confused with the IRS payment method.

Eligible entities

According to the IRS State & Local Governments factsheet, cities, counties, and other political subdivisions are eligible to apply for direct pay as well as the following non-exhaustive list:

• Religious Organizations (churches, mosques, temples, etc.)
• Water districts
• School districts
  • Economic development agencies
  • Public universities and hospitals that are agencies and instrumentalities of CT or political subdivisions

Eligible clean energy projects and relevant tax credits

The non-exhaustive table below highlights tax credits that are eligible for Direct Pay and that may be most useful for municipalities and nonprofit entities. For a complete list of tax credits for which Direct Pay can be used, please see Publication 5817-G (6-2023).

Applying for direct pay

To apply for direct payments, projects need to fit certain criteria and entities need to gather and submit specific documents. The following steps provide a high-level overview of the process. For additional assistance, follow the resources listed on the Lawyers for Good Government site.

1. If Applicable, Apply for the Low-Income Bonus Credit at the Beginning of the Calendar Year
   1. This step has to be done before the project is placed in service.
   2. Low-Income Communities Bonus Credit Program Portal
2. Project Placed in Service
   1. Project must be placed in service for the tax year for which you are applying.
   2. Confirm that the project meets the eligibility criteria for the applicable tax credit and any additional requirements, such as labor and wage standards, for credits initiate after placement in service.
3. Collect Necessary Information
   1. Gather the following details to ensure smooth filing
      1. Tax period and any fiscal year specifics
      2. Employee Identification Number (EIN)
      3. Registrant’s address and contact details
      4. Banking information for direct pay reimbursements
      5. Collect all supporting documentation, such as labor compliance records, emissions reports, or domestic content certification, for any bonus credits
   2. Collect all supporting information for applicable bonuses, such as prevailing wage and apprenticeship standards, domestic content, and energy community bonuses.
4. Submit Pre-Filing Registration with the IRS
   1. The IRS recommends filing at least 120 days before the tax return due date. The filing can only be amended after a prior submission has been processed by the IRS and returned.
5. Receive Registration Number
   1. A unique registration number is issued for each applicable project/ property. This has to be done ‘in sufficient time’ to have a number before filing the tax return.
   2. It is possible to bulk upload document and account delegation (adding other authorized users) are allowed.
   3. Use this number for filing your tax return.
6. File Tax Return
   1. Include the registration number and supporting documentation when filing the return.
   2. Fill out Form 990-T (for exempt organizations, if applicable)
   3. Form 3800 (General Business Credit form)
   4. Credit-specific forms, along with the registration number(s) and supporting documentation.
7. Receive Direct Pay Reimbursement
   1. Payments occur after your return is processed.
   2. Processing times may vary; ensure baking information is accurate for prompt payment.

For more detailed guidance, refer to the IRS Overview of Elective Pay and Transferability.

Bonus adders

The Inflation Reduction Act of 2022 introduced several bonus tax credits to enhance baseline incentives for clean energy and sustainable projects (relevant mostly to commercial and direct-pay entities), namely the Low-Income Community, Energy Community Bonus Credit, Domestic Content Bonus Credit, and the Prevailing Wage & Apprenticeship bonus credits. These bonuses aim to promote equitable development, domestic manufacturing, and job creation while targeting specific geographic and socioeconomic needs. Please review the credits below: