What you need to know about the IRA: Elective/Direct Pay

What is elective pay?

With a mix of federal funding and tax credits, the Inflation Reduction Act includes a new mechanism called elective or direct pay for tax-exempt entities — local governments, tribal nations, 501(c)(3) organizations, religious 501(d) organizations, and rural energy cooperatives — to take advantage of many of the new clean energy tax incentives included in the law.

Why there are two names: When the Inflation Reduction Act bill passed, it named this mechanism direct pay however the IRS already had something in place called direct pay so they started calling it elective pay. We used to call it direct pay, but have changed to elective pay due to IRS guidance.

What is eligible for elective pay?

There are two ways elective pay will be most helpful for tax-exempt entities: electric vehicles and renewable energy systems. View the IRS full list of clean energy eligible tax credits [PDF]

----------

January 2024 Update: The pre-registration portal is now open for tax-exempt entities to register their eligible projects for elective pay.

The U.S. Treasury Department shared a press release in with links to helpful information.
A Pre-Filing Registration Tool User Guide [PDF] is available for download.

June 2023 Update: IRS released guidance on elective pay and transferability. They're working on implementing these options and will provide more information about how to claim these clean energy tax credits in late 2023.

March 2023 Update: Assistant Secretary for Tax Policy Lily Batchelder gave remarks on implementation of the Inflation Reduction Act, including elective pay guidance. Batchelder said the IRS is creating a prefiling process for organizations that will allow them to access elective pay. More to come!

Electric Vehicles

The Inflation Reduction Act creates a new credit for qualified commercial vehicles whereby tax-exempt entities will receive a payment of up to 30% of the cost of a qualified vehicle.

There is a payment limit:

$7,500 for vehicles with a gross weight of fewer than 14,000 pounds (fleet cars, heavy-duty trucks).
$40,000 limit for vehicles at or above that weight (school buses, utility bucket trucks, fire trucks).

Renewable Energy Systems

For renewable energy projects, the elective pay option also applies to the Production Tax Credit and the Investment Tax Credit, both of which are primary investment credits used to help finance renewable energy projects.

Tax-exempt entities that finance a clean energy capital project, such as a solar array, are eligible to receive up to 30% of the cost of the project paid for from the Department of the Treasury.

If the tax-exempt entity receives a grant for the project, they are eligible for the full elective payment up to the cost of the project. For example, if a school district receives an $80,000 Solar for Schools grant (for a $100,000 solar array), they would receive a $20,000 elective payment. Without a grant, the district would receive $30,000 elective pay for the solar array.

Why is elective pay important?

Historically, only taxpaying entities were able to take advantage of renewable energy tax incentives, but this legislation levels the playing field between taxpaying and non-taxpaying entities and opens the door for everyone to access these incentives.

Additionally, it incentivizes ownership from day one, instead of utilizing Power Purchase Agreements.

How to apply for elective pay?

From the White House Direct (Elective) Pay webpage

Identify the project and the credit you want to pursue.
Complete pre-filing registration with the IRS early. It can take up to 120 days to receive a unique registration number for each project, and you must have the number before you can file a tax return.
Complete your project, place it into service, and determine the corresponding tax year.
Determine when you tax return will be due — 4.5 months after the end of the taxable year (possible 6 month extension is available if you request it).
Once you receive a valid registration number, file your tax return (Form 990-T and Form 3800) by the due date, including extensions.
Receive your elective payment, likely more than one year after the project is placed into serve and the money is spent.

View a sample timeline

Updated 5/21/2024

Want to know more?

Email us! Send us your questions or resources you find useful, like Lawyers for Good Government's resource page on Elective Pay and the IRA.

Please note: We're sharing resources to assist Minnesotans who are seeking information about federal funding opportunities. These resources are based on preliminary information released by the federal government. Program information may change as more guidance is provided by federal and state governments. For specific information on federal funding, please visit the relevant U.S. Government websites.

Visit our guide to the clean energy incentives within the Inflation Reduction Act.

GUIDE TO THE INFLATION REDUCTION ACT

Feel free to republish this post!

We encourage reuse and republishing of this article. All Clean Energy Resource Teams news posts are made available under the Creative Commons Attribution license, meaning you can share and adapt the work as long as you give us credit. We'd also love it if you link back to the original piece. Have questions or want to chat? Drop us a line.

Search