Finalized regs implementing the direct pay election for certain credits under the Inflation Reduction Act (PL 117-169) need specific clarifications regarding what constitutes an applicable entity; how tax-exempt bond proceeds should be allocated; the treatment of interim tax-exempt financing; and tax form instructions, according to the American Bar Association’s Tax Section.
Pursuant to Code Sec. 6417, applicable taxpayers may opt to treat certain credits as making a payment against their income tax equal to the amount of such credit for the tax year with respect to which such credit was determined. For more details on which credits qualify for this election, see Checkpoint’s summary of the Inflation Reduction Act.
On June 21, the IRS issued proposed regs on the Section 6417 payment election to provide guidance on definitions, special rules for partnerships and S corporations, repayment of excessive payments, and the process for IRS pre-filing registration. According to the proposed rules, the guidance would affect tax-exempt organizations, state and local governments, Indian tribal governments, Alaska Native Corporations, the Tennessee Valley Authority, and rural electric cooperatives, as well as taxpayers eligible to receive credit payment amounts in a tax year.
Alongside the proposed regs, the IRS also released related FAQs but warned that answers are subject to change as regs are finalized after the public comment period, which lapsed earlier in August. The FAQs begin with a disclaimer that, generally, “Treasury and the IRS do not provide personalized tax advice regarding whether a specific organization’s project or activity is eligible for a tax credit.” Taxpayers are instead encouraged to go to its webpage on Inflation Reduction Act credits and deductions.
The ABA submitted written comments August 14 in a letter to IRS Commissioner Danny Werfel from Tax Section Chair Scott Michel. Chief among the ABA’s recommendations concerned some government-owned single-member entities. Their letter explains that while in a letter to IRS Commissioner Danny Werfel from Tax Section Chair Scott Michel. Chief among the ABA’s recommendations concerned some government-owned single-member entities. Their letter explains that while Prop Reg §1.6417-1(c)(7) includes an “agency or instrumentality” to the list of applicable entities described in Section 6417(a), the definition or scope of “instrumentality” is unclear. It goes on to explain how municipal governments conduct renewable energy projects in a “variety of legal structures,” such as a special purpose entity established for non-tax reasons.
“The law is even less clear regarding whether a second-tier (or lower-tier) subsidiary is itself an instrumentality of a government if the government owns the subsidiary only indirectly,” read the letter. “Because of the uncertainty inherent in applying a facts and circumstances test and even uncertainty with regard to which Revenue Ruling [Rev Rul 57-128 and Rev Rul 89-49] applies, it may not be clear that a particular second-tier subsidiary is an instrumentality of one of the entities.” Thus, the ABA recommended second-tier and lower-tier subsidiaries qualify as applicable entities for the purposes of Section 6417.
The group also sought further guidance on how to calculate the credit reduction under various inflation bill provisions for tax-exempt bond financing purposes. Their recommendations include the suggestion that entities “calculate the percentage of the Credit Reduction by the time the bonds or the interim tax-exempt financing are issued” because requiring a recalculation after bonds are issued “could lead to significant administrative burdens and introduce budgeting uncertainties.” The ABA also favors automatic allocation of bond proceeds to portions of an overall facility not considered part of the “qualified facility.”
Remaining comments in the ABA’s letter pertain first to the issue of whether interim short-term tax-exempt debt should be treated equally as long-term permanent financing for credit reduction purposes, which the Tax Section does not support. Second, the ABA noted that Form 8835, Renewable Electricity Production Credit, instructions are “entirely silent” on the credit reduction requirement’s application.
“The instructions should cover all Applicable Credit types,” the ABA said. “For instance, for the renewable electricity production credit, the instructions should illustrate how the reduction is determined each year, taking into account the appropriate approach for allocating tax-exempt bond proceeds and other funding sources.”
For more information regarding the Section 6417 election, see Checkpoint’s Federal Tax Coordinator ¶L-17981.
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