Starting January 19, 2025, new IRS rules open up clean energy tax credits to non-profits and government entities, fueling broader participation in renewable energy projects.
At a Glance
- IRS finalizes rules for clean energy tax credits, involving co-ownership projects.
- Elective pay provides refundable payments for entities with minimal tax liability.
- Non-profits, government bodies, and tribal organizations benefit through elective pay.
- Regulations effective in January 2025, promoting sustainable energy transition.
IRS, Treasury Revamp Access to Tax Credits
The IRS and U.S. Treasury Department recently announced rules expanding clean energy tax credit access for co-owned projects. These revised regulations aim to empower non-profits, government entities, and tribal organizations by converting their clean energy tax credits into cash via elective pay. This facilitates investments in green projects even for organizations with nominal or no federal tax liability. This move is intended to widen the engagement of these entities in sustainable energy initiatives.
The guidelines specifically target co-ownership arrangements, allowing tax-exempt entities to invest alongside for-profit developers. Traditionally, partnerships were ineligible for direct pay, but the new rules permit co-owned projects to opt out of partnership status for tax purposes. Eligible entities can claim and utilize their share of tax credits through direct pay, enhancing financial scope and investment opportunities in green technology.
A New Era
Elective pay, often referred to as “direct pay,” is a cornerstone of these new regulations, transforming clean energy credits into refundable payments. This mechanism is crucial for entities such as non-profits and state governments that typically have limited tax liabilities. The Inflation Reduction Act of 2022 plays a pivotal role, allowing these tax-exempt organizations to claim and receive refunds for applicable credits, even with zero federal income tax liability.
“Direct pay is helping more clean energy projects be built quickly and affordably, and American communities are benefitting as a result,” said Wally Adeyemo, the deputy secretary of the Treasury.
The entities eligible for this direct-pay election include a wide range of bodies — from Sec. 501(a) tax-exempt organizations to Indian tribal governments and rural electric cooperatives. This election covers credits related to various clean-energy projects, including geothermal, solar, and energy-storage technologies. A detailed pre-filing registration process will be required, ensuring compliance and tracking.
Implications for Clean Energy Sector
These IRS regulations align with the Biden administration’s broader strategy to stimulate renewable energy investments and reduce carbon emissions. By providing incentives through clear regulations and practical solutions like elective pay, these rules are expected to expedite clean energy projects and bolster a sustainable economy. By bridging the gap in available capital, these measures bring a significant boost to the renewable energy sector.
The future of these credits are in question, though, with the incoming Trump administration. While President-elect Donald Trump is often in favor of tax cuts, programs such as these focused on clean energy often draw his ire.