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IRS Clarifies Which Tax-Exempt Entities Qualify for “Direct Pay” In Lieu of Clean-Energy Tax Credits

on Wednesday, 18 October 2023 in Dirt Alert: David C. Levy, Editor

Proposed IRS regulations clarify that political subdivisions, electrical cooperatives and other tax-exempt entities qualify to receive direct payments in lieu of clean-energy tax credits.

The Internal Revenue Service (“IRS”) recently proposed regulations that clarify which entities qualify for the “direct pay” benefit under the Inflation Reduction Act (“IRA”).  These credits include the alternative fuel vehicle refueling property credit, electricity production credit, carbon oxide sequestration credit, zero-emission nuclear power production credit, clean hydrogen production credit, commercial clean vehicle credit, advanced manufacturing production credit, clean electricity production credit, clean fuel production credit, energy credit, advanced energy project credit and clean electricity investment credit.

The IRA enabled certain tax-exempt entities to receive direct payments from the IRS in lieu of the clean energy tax credits for which they, as tax-exempt entities, would otherwise be ineligible.  The IRA generally defined which entities qualify.  Eligible entities include, among others, (1) “[a]ny organization exempt from [federal income tax],” (2) “[a]ny State or political subdivision thereof” and (3) “[a]ny corporation operating on a cooperative basis that is engaged in furnishing electric energy to persons in rural areas.”  Internal Revenue Code (“IRC”) section 6417(d)(1).

The IRS’s proposed regulations offer more specificity.  Below is a partial list of entities operating in Nebraska that may receive direct pay under the proposed regulations:

  • Public Power Districts. Echoing the IRA, the proposed regulations specifically permit “any state or political subdivision thereof” to qualify for the direct pay program.  Thus, Nebraska public power districts likely qualify for direct pay.  Nebraska Revised Statutes section 70-602 provides that public power districts are political subdivisions of the State.
  • Electrical Cooperatives. Electrical cooperatives likely qualify for direct pay so long as they are tax-exempt.  Some, such as the Municipal Energy Agency of Nebraska (MEAN), are political subdivisions of the state and thus qualify regardless of their tax-exempt status.  Electrical cooperatives that, under the laws of their state of incorporation, are not political subdivisions, can still qualify for the “direct pay” benefit if they are tax‑exempt, via IRC section 501(c)(12).
  • Taxable Nonprofit Corporations. Non-profit organizations that do not hold federal tax-exempt status do not qualify for the “direct pay” benefit.  This likely renders organizations such as the Tri-State Generation and Transmission Association, Inc., which is a non-profit taxable entity, ineligible.  

For those taxable entities that do not qualify under any of the foregoing sections or others not mentioned in this article, the IRA also provides an option to elect in.  The manner, required forms and revocability of these elections, as well as the general direct pay elections, are case specific.  The proposed regulations address those issues directly.  

The public-comment period for these proposed regulations closed on August 14, 2023.  Next, the IRS will finalize the rule and likely publish the same within the next year.  We will continue to monitor Nebraska organizations’ eligibility for direct pay.

Attorneys at Baird Holm LLP have extensive experience in clean energy tax credit matters, renewable energy, and other general corporate and taxation matters.  If you have any questions or would like to discuss the potential eligibility of your entity, please do not hesitate to contact the firm.

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