Direct Pay

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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).

Tax Credit	Available for 2023-2032 Tax Years	Credit Amount
Production Tax Credit for Electricity from Renewables (§45, pre-2025)	For the production of electricity from eligible renewable sources, including wind, biomass, geothermal, solar, small irrigation, landfill and trash, hydropower, marine, and hydrokinetic energy. For more information, visit here.

Tax Credit	Available for 2023-2032 Tax Years	Credit Amount
		For 2022: 0.55 cents/kilowatt (kW); (½ rate for electricity produced from open-loop biomass, landfill gas, and trash); 2.75 cents/kW if Prevailing Wage and Apprenticeship (PWA) rules are met.
Investment Tax Credit for Energy Property (§48, pre-2025)	For investment in renewable energy projects including fuel cell, solar, geothermal, small wind, energy storage, biogas, microgrid controllers, and combined heat and power properties. For more information visit here.	6% of qualified investment (basis); 30% if Prevailing Wage and Apprenticeship (PWA) rules are met.
Credit for Qualified Commercial Clean Vehicles (§45W)	For purchasers of commercial clean vehicles. Qualifying vehicles include passenger vehicles, buses, ambulances, and certain other vehicles for use on public streets, roads, and highways. For more information, visit here.	Up to $40,000 (max $7,500 for vehicles <14,000 lbs).
Alternative Fuel Vehicle Refueling Property Credit (§ 30C)	For alternative fuel vehicle refueling and charging property (i.e., charging stations), located in low-income and non-urban areas. Qualified fuels include electricity, ethanol, natural gas, hydrogen, and biodiesel. For more information, visit here.	6% of basis for businesses and can increase to 30% if Prevailing Wage and Apprenticeship (PWA) rules are met.

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.

If Applicable, Apply for the Low-Income Bonus Credit at the Beginning of the Calendar Year

This step has to be done before the project is placed in service.

Low-Income Communities Bonus Credit Program Portal

Project Placed in Service

Project must be placed in service for the tax year for which you are applying.

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.

Collect Necessary Information

Gather the following details to ensure smooth filing

Tax period and any fiscal year specifics

Employee Identification Number (EIN)

Registrant’s address and contact details

Banking information for direct pay reimbursements

Collect all supporting documentation, such as labor compliance records, emissions reports, or domestic content certification, for any bonus credits

Collect all supporting information for applicable bonuses, such as prevailing wage and apprenticeship standards, domestic content, and energy community bonuses.

Submit Pre-Filing Registration with the IRS

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.

Receive Registration Number

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.

It is possible to bulk upload document and account delegation (adding other authorized users) are allowed.

Use this number for filing your tax return.

File Tax Return

Include the registration number and supporting documentation when filing the return.

Fill out Form 990-T (for exempt organizations, if applicable)

Form 3800 (General Business Credit form)

Credit-specific forms, along with the registration number(s) and supporting documentation.

Receive Direct Pay Reimbursement

Payments occur after your return is processed.

Processing times may vary; ensure baking information is accurate for prompt payment.

Source: The Direct Pay Guide by the Lawyers of Good Government

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:

Bonus Type

Eligible Tax Credits

Key Criteria

Additional Requirements

Low-Income Community Bonus Credit

Investment Tax Credit (ITC) (§48)

Clean Electricity Investment Tax Credit (§48E)

The credit provides a 10 or 20% increase to the investment tax credit for qualified facilities with a maximum net output of less than five megawatts.

Use this map to locate eligible areas.

Domestic Content, Prevailing Wage

Energy Community Bonus Credit

ITC (§48)

Clean Electricity Investment Tax Credit (§48E)

Production Tax Credit (PTC) (§45)

Clean Electricity Production Tax Credit (§45Y)

The credit applies a bonus of up to 10% (for production tax credits) or 10 percentage points (for investment tax credits) for projects, facilities, and technologies located in energy communities.

Use this map to locate eligible areas. in fossil fuel-dependent communities or coal transition areas.

Domestic Content, Prevailing Wage

Domestic Content Bonus

ITC (§48)

Clean Electricity Investment Tax Credit (§48E)

PTC (§45)

Clean Electricity Production Tax Credit (§45Y)

The credit is available to taxpayers that certify their qualified facility, energy project or energy storage technology was built with certain percentages of steel, iron or manufactured products that were mined, produced or manufactured in the United States. For more information, visit here.

None

Prevailing Wage & Apprenticeship

ITC (§48)

Clean Electricity Investment Tax Credit (§48E)

PTC (§45)

Clean Electricity Production Tax Credit (§45Y)

Carbon Capture and Sequestration Credit (§45Q)

Clean Hydrogen Production Tax Credit (§45V)

Advanced Energy Project Tax Credit (§48C)

Alternative Fuel Vehicle Refueling Property Credit (§30C)

Clean Fuel Production (§45Z)

New Energy-Efficient Homes (§45L)

Zero-Emission Nuclear Power Production (§45U)

Deduction for Energy Efficient Commercial Buildings (during installation) (§179D)

The credit has two parts, the prevailing wage requirement and the apprenticeship document. The prevailing wage requirement explains that laborers and mechanics employed by the taxpayer in the alteration and repair of a facility or project are paid at wages not less than prevailing rates as determined by the Secretary of the U.S. Department of Labor (DOL). The apprenticeship requirement explains that those employed must meet labor hour requirements for the construction of the facility. For more information, visit here.

Must be documented and certified.

Connecticut State Department of Revenue Services

Tax-Exempt Entities Direct Pay Opportunities