We previously posted about the Inflation Reduction Act (IRA) — the clean energy bill that allocates $369 billion incentivize clean energy economy – and how it applies to tax-exempt entities (including churches), here and here. Specifically, for tax-exempt entities, the IRA includes a new “direct pay” provision that allows tax-exempt entities to immediately monetize applicable tax credits (the production tax credit and/or the investment tax credit) by claiming them as direct payments from the U.S. Treasury.
As we wrote before, the IRA is a game changer for tax-exempt entities that want to invest in renewable energy or are looking to repurpose excess property. The availability of direct payments for tax credits means that the “payback” period for any renewable project can be greatly reduced, which means we’ll see more of them.
Until now, the Department of Treasury had not provided any guidance on how the direct pay provision would work. The Treasury Department has recently issued proposed rules clarifying aspects of the direct pay process in its final regulations. The new rule would require a pre-filing registration process that would require the applicable entity that wants to elect the direct pay to register with the IRS through an IRS electronic portal in advance of filing the return on which the election is made.
Additional regulations clarify the rules regarding transferability of the direct pay provision to partners who would not be eligible on their own – they can’t claim direct pay on behalf of their partners. Tax-exempt entities will not be able to buy tax credits through transferability (which allows entities that qualify for a tax credit but are not eligible to use direct pay to transfer all or a portion of the credit to a third-party buyer in exchange for cash) and then go on to receive direct payment.
These proposed regulations are subject to public comment by August 14, 2023, with public hearing on August 21st and 23rd, 2023. More information will continue to develop as the final rules are adopted.
If your church would like to benefit financially from the IRA but needs help navigating the regulations, please contact us.
