The IRS finalized regs providing guidance on how clean energy projects with multiple owners can elect to not be treated as partnerships to qualify for elective pay of Inflation Reduction Act (P.L. 117-169) credits. (TD 10012; IR 2024-292, 11/19/2024)
Background
The Inflation Reduction Act created or modified existing tax benefits for those in clean energy industries. Many are available to businesses; tax-exempt organizations; and state, local, and tribal governments. These provisions offer tax credits for energy generation and carbon capture, manufacturing, vehicles, and fuels.
Certain entities are eligible for Elective Pay (or Direct Pay), an option provided by the IRS under Code Sec. 6417 letting taxpayers claim an applicable credit amount in the form of payment against their tax liability. (For a full list of Inflation Reduction Act tax provisions eligible for Elective Pay, see here.)
In March, the Treasury Department and the IRS published final regs (TD 9988) clarifying aspects of the elective payment election. (Notice 2024-27, 2024-12 IRB). In the same announcement, the IRS also proposed additional regs to allow certain unincorporated organizations that are owned in whole or in part by applicable entities to be excluded from the application of partnership tax rules, as partnerships, pursuant to the statute, are not considered applicable entities.
The IRS said in the preamble of the proposed regs that it received comments from taxpayers requesting guidance on how applicable credit property co-ownership arrangements could qualify under Code Sec. 761(a) to be excluded from the application of Subchapter K. Common “facts and circumstances” among jointly owned and operated renewable energy projects “appear to violate” existing rules, stakeholders told the agency.
Final regs
On November 19, these regs were finalized without major substantive changes. Of the 11 public comments submitted during the open comment period, many pertained to fact patterns unique to Code Sec. 6417, the domestic content rules of Code Sec. 45(b)(10), the Code Sec. 45W credit for qualified commercial clean vehicles, and the Code Sec. 30C alternative fuel vehicle refueling property credit.
While most comments were dismissed for going beyond the scope of the proposed regs, the IRS did agree with one taxpayer who suggested applying rules similar to those applicable to assignments of payments under Section 1603 of the American Recovery and Reinvestment Act of 2009 (P.L. 111-5). For example: the requirement that each payment be assigned to a bank or other financing institution, that the assignment cover all amounts payable and not be subject to further assignment, and that the assignee file a Notice of Assignment.
As explained in an accompanying IRS release, “the final regulations clarify that eligible co-ownership arrangements can be organized to own and operate property giving rise to any of the clean energy tax credits for which elective pay is available.” The regs “also enable these arrangements to invest in clean energy projects through a noncorporate entity, such as a limited liability company.”
Applicability date
The final regs are effective January 19, 2025.
Proposed regs
In the same release, the IRS announced new proposed regs adding additional administrative requirements for members of an unincorporated corporation to elect out of partnership tax treatment. (See Proposed Admin Rules Issued on Subchapter K Treatment Exclusion for Unincorporated Orgs.)
For more on the elective payment election for Inflation Reduction Act clean energy credits, see Checkpoint’s Federal Tax Coordinator ¶ L-17981.
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