Last month, the Treasury Department and IRS released final regulations on the elective pay rules under the Inflation Reduction Act of 2022 (IRA). The IRA introduced new rules allowing tax-exempt organizations to take advantage of federal tax credits for certain clean energy projects. Historically, tax-exempt organizations have not been able to tax advantage of tax credits because they are exempt from paying federal income taxes and thus have no tax liability to credit. Now, eligible organizations can make the elective pay election and receive a tax refund for the value of the credit(s) in the form of a direct payment.
Which Organizations are Eligible to Use Elective Pay?
The final regulations provide that any organization described in I.R.C. §§ 501 – 530 that meet the requirements for elective pay are eligible. This includes all 501(c) organizations, such as private foundations, public charities, labor organizations, and social welfare organizations, as well as homeowners associations exempt under I.R.C. § 528 and political organizations exempt under I.R.C. § 527.
Which Credits are Eligible for Elective Pay?
There are currently twelve credits that are eligible for elective pay:
Energy Credit (§ 48)
for investment in renewable energy projects including fuel cell, solar, geothermal, small wind, energy storage, biogas, microgrid controllers, and combines heat and power properties.
Clean Electricity Investment Credit (§ 48E)
Technology-neutral investment in facilities that generate clean electricity and qualified energy storage technologies.
Renewable Electricity Production Credit (§ 45)
For production of electricity from eligible renewable sources, including wind, biomass, geothermal, solar, small irrigation, landfill and trash, hydropower, marine, and hydrokinetic energy.
Clean Electricity Production Credit (§ 45Y)
Technology-neutral production of clean electricity.
Commercial Clean Vehicle Credit (§ 45W)
For purchases of commercial clean vehicles including passenger vehicles, buses, ambulances, and certain other vehicles for use on public street, roads, and highways.
Zero-Emission Nuclear Power Production Credit (§ 45U)
For electricity from nuclear power facilities in operation prior to August 16, 2022.
Advanced Manufacturing Production Credit (§ 45X)
Production of domestic clean energy manufacturing of components including solar and wind energy, inverters, battery components, and critical materials.
Clean Hydrogen Production Credit (§ 45V)
For producing clean hydrogen at a qualified, U.S.-based clean hydrogen production facility.
Clean Fuel Production Credit (§ 45Z)
Technology-neutral domestic production of clean transportation fuels, including sustainable aviation fuels.
Carbon Oxide Sequestration Credit (§ 45Q)
Carbon dioxide sequestration coupled with permitted end uses in the U.S.
Credit for Alternative Fuel Vehicle Refueling/Recharging Property (§ 30C)
For alternative fuel vehicle refueling ad charging property located in low-income and non-urban areas. Qualified fuels include electricity, ethanol, natural gas, hydrogen, and biodiesel.
Qualifying Advanced Energy Project Credit (§ 48C)
For investments in advanced energy projects.
An organization may make only one election with respect to the §§ 45V, 45Q, and 45X credits.
How Do I Make an Elective Pay Election?
Generally, the organization intending to make the elective pay election must satisfy all eligibility requirements for the tax credit and complete a pre-filing registration with the IRS. Further, the clean energy project must be put into service prior to claiming the credit. Once these requirements are met, the elective pay election is made upon filing a Form 990-T along with the applicable form(s) required to be submitted to claim the relevant tax credit(s) and a completed Form 3800, General Business Credit.
Note that the elective pay election can only be made for the year in which the project was put into service and must be claimed on the organization’s original 990-T. Only under special circumstances will the IRS permit the election to be made via amended return or by filing an administrative adjustment request.
What Happens After I Make the Elective Pay Election?
After filing the organization’s 990-T and supporting documents, the IRS will process and, if all requirements to receive the credit are met, will issue a payment to the organization. The IRS has stated that generally organizations can anticipate the payment within 45 days after the organization filed its annual return.
Kyler Mejia is an associate (bar admission pending) with Caritas Law Group, P.C. Kyler counsels nonprofit and socially responsible businesses on corporate, trademark, tax, and fundraising matters nationwide and advises donors concerning major gifts. To schedule a consultation, call 602-456-0071 or email us through our contact form.