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Elective Pay & Tax

Incentives Under IRA:

The What, When, and How

Presentation for the Urban Sustainability Directors Network

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October 24, 2023

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  1. Introductions
  2. Tax Credits Available
  3. How Does it Work
  4. Planning Considerations & Projects
  5. Next Steps

Agenda

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This Webinar Is Not Legal Advice

This webinar provides a high-level overview only and should not be considered direct, personal legal advice

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Please consult an attorney for legal assistance with your specific matter

Legal Disclaimer: The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information.

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Elective (Direct) Pay & Tax Credits Available

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Direct Pay: What is it?

  • What is Elective Pay (informally referred to as “direct pay”)?
    • Eligible entities (including local governments & nonprofits) would not normally owe large amounts of federal income tax, if any.
    • However, by filing a return and using elective pay, these entities can receive the value of certain clean energy and clean transportation tax incentives as a tax-free cash payment from the IRS.
  • Brand New Source of Funding for States, Local governments, Tribes, nonprofits, etc. to be reimbursed for creating new renewable energy projects, like:
    • Investing in and constructing clean energy (wind, solar, green hydrogen, etc.)
    • Transition government vehicle fleet to EV
    • Placement of EV infrastructure in rural, urban and low income
    • Rooftop Solar

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Parties Eligible for Direct Pay

  • Exempt organizations under Section 501 of the Tax Code
  • States and local governments, other instrumentalities (public schools, libraries)
  • Territories, agencies, instrumentalities
  • Municipally-owned utilities
  • Indian tribal governments
  • Alaska Native Corporations
  • Tennessee Valley Authority
  • Rural electric coops

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Parties Eligible for Direct Pay

  • Exempt organizations under Section 501 of the Tax Code
  • States and local governments, other instrumentalities (public schools, libraries)
  • Territories, agencies, instrumentalities
  • Municipally-owned utilities
  • Indian tribal governments
  • Alaska Native Corporations
  • Tennessee Valley Authority
  • Rural electric coops

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Tax Incentives Eligible for Direct Pay

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Tax Incentives Eligible for Direct Pay

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Clean Energy Tax Credits: ITC & PTC

* Based on meeting prevailing wage and apprenticeship requirements.

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Additional Bonus Tax Incentives

“Layering”

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Layering Incentives: Adding to and Subtracting From

Elective Pay

Prevailing Wage and Apprenticeship Requirements

(Potential Reduction)

To receive the full 30% base commensurate with pre-IRA levels, in many cases (including ITC/CEITC, PTC/CEPTC, carbon capture credit, hydrogen credit, EV infrastructure) project generally must meet prevailing wage and apprenticeship requirements. Otherwise, most credits are reduced.

Domestic Content Requirement

(Potential Bonus & Reduction)

Projects or facilities that meet domestic content requirements are eligible for a 10% increase to the PTC/CEPTC or up to 10 percentage point increase to the ITC/CEITC. ****For projects or facilities beginning construction in 2024 or later, elective pay phases down and eventually is eliminated altogether, unless the domestic content requirement is met (Another area of complexity )

Energy Communities Bonus (Potential Addition)

Projects located in areas with closed coal mines or coal-fired power plants may be eligible for another 10% increase in the PTC/CEPTC and an up to 10 percentage point increase in the ITC/CEITC.

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Also available for brownfield sites and areas that have significant employment or local tax revenues from fossil fuels and higher than average unemployment.

Low Income Communities Bonus Credit Program

(Potential Addition)

*Application Rqd

The program provides an additional credit of 10- 20 % points to applicable credits that are part of the ITC for certain facilities located on Tribal land, in federally subsidized housing, in low-income communities, or in low-income economic benefit projects.

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Portal Now Open! You must apply and receive allocation, then place in service to claim this bonus; however, it also helps you meet Justice40 requirements to benefit disadvantaged communities.

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Domestic Content (ITC & PTC only)

  • Domestic Content Requirements: Must Be Met to Avoid Phase Out of Elective Pay for ITC/CEITC and PTC/CEPTC
    • If met, 10% bonus
    • if not met, significantly impacts amount of Elective Pay (30% base) available:
      • Only 90% if construction begins in 2024
      • Only 85% if construction begins in 2025
      • None if construction begins 2026 or later

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  • Exceptions/Waivers:
    • If DC requirements increase the costs of construction by > 25 % or
    • if required materials not produced in the US in sufficient quantity or quality

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  • Include DC Requirements in RFP Bid Package for Wind/Solar Projects

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Complex process, additional guidance ostensibly coming from Treasury and the IRS, use interim guidance for now

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Low Income Communities Application Process - PORTAL NOW OPEN!

Additional 10-20% Incentive Available, Complicated Process

  • The Low-Income Communities Bonus Credit increases the ITC for certain wind and solar projects (maximum net output <5MW AC) by 10 or 20 % for certain facilities located on Indian land, in federally subsidized housing, in low-income communities, or in low-income economic benefit projects.
  • Application and Approval Required: Eligible taxpayers must pre-apply, receive a capacity allocation, and then place their facility “in service” to claim the Low-Income Communities Bonus Credit
  • PORTAL IS NOW OPEN! October 19-Nov 19th - All applications filed equally
  • Provides additional incentive and help states/locals meet Justice40 Requirements by benefiting disadvantaged communities
  • L4GG Fact Sheet - In your packet

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Mechanics of Direct Pay: How it Works

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Direct Pay: Mechanics & Process

IRS Filings

File tax return (Form 990-T) & Form 3800 with registration number and supporting documentation by tax deadline

  • Due 4.5 months after end of taxable year (+6-month extension if requested)

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Register project for which tax credit will be claimed on a to-be-released online portal from the IRS

•Get unique registration number

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Registration

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Refund

IRS makes payment after review of tax filing

  • Likely more than 1 year after project is placed into service/money is spent

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Mechanics of Direct Pay – Overview

  • Identify and pursue the qualifying project or activity
  • Work with accountant (CFO) and attorney to calculate credit you intend to earn
  • Complete your project and place it into service
  • Determine taxable year in which the project is placed in service
  • Complete pre-filing registration form with the IRS portal and obtain registration number for each “applicable credit property”
  • File Form 990-T (or other applicable tax return) and Form 3800 (with registration number for each eligible property) by due date (typically May 15), or extension date, and make a valid elective pay election
    • Can include multiple applicable credit properties (registration IDs) on the same 990-T Form, IF for the same applicable tax year
  • Receive payment after the return is processed (no deadline, but financial institutions estimate 18 months)

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Mechanics and Other Planning Considerations

  • Pre-Filing Registration: Applicable entity must file a pre-registration form in the portal (open later in 2023) to receive registration ID for each eligible credit property. Regulations and further guidance forthcoming.
    • Supporting documentation required. Registration is good for that tax year only; if project delayed, registration must be renewed. If the relevant facts change, the registration must be updated.
  • Election on Return: The election is made on the entity’s relevant tax return (e.g., Form 990-T) for the year, along with Form 3800, with the registration ID for each eligible credit property.
    • Timing: The election generally must be filed by the due date of the original annual tax return for the tax year in which the election is made, including extensions (6 mo extension upon request).
  • Irrevocable/Applies to All Credits That Year: Once made, election is irrevocable and applies to any applicable renewable energy tax credit for that tax year (ITC cannot change to PTC)
    • Proposed regulations do not allow you to revoke or amend return to change the type of credit you intend to take.

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Planning, Projects & Considerations

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Direct Pay: Bureaucratic Considerations

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Direct Pay: Benefits

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Types of Projects to Consider

    • EV Infrastructure Placement

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    • EV Fleet Transition: governmental vehicles, school buses, public transit, etc.
      • Stacking with EPA clean school bus, heavy-duty vehicle, DERA funds, etc.
      • No Domestic Content Requirements

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    • Rooftop Solar/Wind on government buildings, affordable housing
      • Consider owning the panel and avoiding power purchase agreements
      • Now with Direct Pay - can consider doing the work and owning the panels
      • Look into Domestic Content Requirements - Include in Bid Package

    • Microgrid or community solar projects or wind projects in low income/energy communities or brownfields

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    • Education - Resources for Nonprofits and Communities

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Additional Resources & Guidance Documents

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Questions and Discussion

More Information/Questions/Feedback:

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Amy Turner: aturner@law.columbia.edu

Jillian Blanchard: Jillian@l4gg.org

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