New provisions of the Inflation Reduction Act allow state, local and tribal governments, nonprofit organizations, U.S. territories, rural energy cooperatives and more to access tax credits to build a clean energy economy
Washington D.C. — As part of the Biden-Harris Administration’s Investing in America agenda, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) today released guidance on key provisions of the Inflation Reduction Act for Expand the reach of clean energy tax credits and help build projects more quickly and affordably, which will create good-paying jobs, reduce energy costs for families, and promote American innovation.
The Inflation Reduction Law created two new credit delivery mechanisms:elective payment (also known as “direct payment”) and transferability—allowing state, local and tribal governments; Nonprofit Organizations, US Territories; and other entities to take advantage of clean energy tax credits. Until the Inflation Reduction Act introduced these new credit delivery mechanisms, governments, many types of tax-exempt organizations, and even many businesses could not fully benefit from tax credits like those that incentivize clean energy construction.
“The Inflation Reduction Act’s new tools for accessing clean energy tax credits are a catalyst for meeting President Biden’s historic economic and climate goals. They will act as a force multiplier, bringing together governments and nonprofit organizations,” said Treasury Secretary Janet L. Yellen. “More clean energy projects will be built quickly and affordably, and more communities will benefit from the growth of the clean energy economy.”
The Inflation Reduction Act allows government and tax-exempt entities to receive elective payments for 12 clean energy tax credits, including major investment and production tax credits, as well as tax credits for electric vehicles and charging stations . Companies can also choose elective payment for three of those credits: the Advanced Manufacturing (45X), Carbon Oxide Sequestration (45Q), and Clean Hydrogen (45V) credits.
The Inflation Reduction Act also allows businesses that do not use elective payment to transfer all or a portion of any of the 11 clean energy credits to a third party in exchange for immediate tax-free funds, so businesses can take advantage of tax breaks if they do. They do not have sufficient tax liability to fully utilize the credits. Previously, entities without sufficient tax obligations were unable to realize the full value of the credits, raising costs and creating challenges in financing projects.
“Direct payment is a game-changer in our ability to spread the benefits of clean energy to every community in America,” said John Podesta, senior advisor to the president for clean energy innovation and implementation. “This provision of the Inflation Reduction Act will make it easier for local governments, tribes, territories, nonprofit organizations, schools, places of worship and more to invest in clean energy, allowing them to save money, improve public health and better serve their communities. .”
The guidance proposed today by the Treasury helps provide clarity so that governments, tax-exempt organizations and businesses understand the scope of the law and eligibility requirements. The proposed regulations clarify which entities would be eligible for each credit monetization mechanism, establish the process and timeline for claiming and receiving an elective payment or transferring credit, and address numerous other issues. Many of those issues were raised by stakeholders in response to Treasury’s wide-ranging effort to solicit public opinion. The proposed regulations released today will now have a formal 60-day public comment period. Treasury and the IRS will carefully consider public comments before issuing final rules.
Today’s guidance also includes temporary regulations for a electronic pre-filing registration requirement. The pre-filing process will help prevent improper payments to fraudulent actors such as criminal syndicates and provide the IRS with basic information to ensure that any taxpayer who qualifies for these credit monetization mechanisms can easily access these benefits.
Treasury and the IRS are committed to ensuring the process works for those who are eligible to take advantage of these provisions. The Treasury and IRS will provide more information about the pre-registration process later this year.
Treasury, working with inter-agency partners, will also undertake outreach activities to educate stakeholders, including through talks, webinars and similar engagements in the coming months. This will include a series of webinars this summer, starting Thursday June 29, where interested parties can obtain more information. In addition, IRS.gov contains more information on the proposed and temporary guidance, as well as the underlying tax credits that can be used with elective payment and transferability.
Nearly three-quarters of the Inflation Reduction Act’s clean energy investment is delivered through tax incentives, putting Treasury at the forefront of this landmark legislation. Since the bill became law last August, the Treasury has worked quickly to draft the rules that will make the promise of this legislation a reality. For a full list of Treasury’s work to implement the Inflation Reduction Act, see below:
May 31, 2023: U.S. Treasury and Energy Departments release additional guidance on Inflation Reduction Act programs to incentivize manufacturing and clean energy investments in hard-hit coal communities