When the Inflation Reduction Act was passed in 2022, the Internal Revenue Service set new regulations that ultimately allow a wider range of entities to fully take advantage of the clean energy tax credits. This article will break down who is eligible to receive these new benefits, and how to maximize the return when receiving these credits.
Overview
Before the Inflation Reduction Act was signed into law, many government entities, start-up businesses, and tax-exempt organizations were not able to fully take advantage of the clean energy tax credits, because they did not have enough tax liability, according to the IRS. With the new elective pay and transferability options that the Inflation Reduction Act introduced, these entities now have the ability to do either two things. They can either get a check from the United States Treasury for the exact credit amount or sell their credits for cash. The selling of the credits is designed to expand the practice of tax credit selling beyond the typical players in these deals.
IRS Guidelines
Part of the new guidelines introduced by the IRS gives more clarification on what entities qualify for the clean energy tax credit. These entities include; water districts, school districts, economic development agencies, and public hospitals and universities. Additionally, there are some private and tax-exempt entities that are also eligible.
Elective Pay vs Transferability
Elective pay allows eligible entities to claim certain credits under the Inflation Reduction Act without having to owe federal income tax. For example, if a public hospital is undergoing a solar panel project, it would still file a federal tax return to receive the credit. Once the credit is received, the IRS would then pay the entity the refund amount that matches the amount of the credit received. Transferability allows an entity that claims certain IRA tax credits to elect to transfer all or a portion of the tax credits to an unrelated third-party transferee in exchange for cash.
Wrap Up
The IRS has released a list of frequently asked questions regarding direct pay and transferability. As time goes on and more entities keep applying for the credit, the IRS will most likely continue to release guidance on this. Give us a call or visit our website for more information regarding clean energy tax credits.