The Internal Revenue Service today published proposed regulations and frequently asked questions that describe rules for applicable entities that receive certain clean energy credits and choose an elective payment election, and rules for eligible taxpayers that choose to transfer certain credits to related parties. Most of the details in print will not be published until June 21, 2023.
For taxable years beginning after December 31, 2022, applicable entities may choose an optional payment election that will treat certain credits as a payment toward their federal income tax liability rather than as a nonrefundable credit. This payment will first cover any tax liability of the organization and any excess will be refundable.
Applicable entities typically include tax-exempt organizations, state and local governments, Indian tribal governments, Alaska Native corporations, the Tennessee Valley Authority, and rural electric cooperatives. All other taxpayers may elect to be the applicable entity for a limited number of credits.
Also, for taxable years beginning after December 31, 2022, certain eligible taxpayers (generally taxpayers that are not applicable entities) may elect to transfer all or a portion of the eligible credit to unrelated taxpayers for cash payments.
Related taxpayers are then allowed to claim the carried forward credits on their tax return. Cash payments are not included in the gross income of the eligible taxpayer and are not deductible by related taxpayers.
“We fully expect this guidance to lead to a massive influx of new renewable energy investments. Making renewable tax credits widely transferable helps address constraints in the nation’s tax capital market, while a new direct payment regime makes it easier for tribes, state and local governments, cooperatives and other nonprofits to participate in the clean energy transition. said Gregory Whetstone, president and CEO of the American Council on Renewable Energy (ACORE), in a press release. “Additionally, the guidance establishing direct pay eligibility for the 45X Advanced Manufacturing Component Credit will allow significant new American clean energy production to move forward.”
Also issued today are temporary regulations that provide rules regarding the IRS’s mandatory pre-registration process, which will be through an electronic portal. The pre-registration process must be completed and an enrollment number obtained before choosing to pay electively or choose to transfer eligible credits.
The process also applies before making an optional payment election related to an advanced manufacturing investment credit under the CHIPS Act of 2022. Proposed regulations were also published today that describe other issues related to the Advanced Manufacturing Investment Credit.
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