Understanding Clean Energy Credits and Elective Pay

Clean energy tax credits have become more accessible for tax-exempt and governmental entities, thanks to new provisions introduced by the Inflation Reduction Act of 2022 (IRA). The IRA has opened up the possibility for these entities to take advantage of clean energy tax credits via elective pay. From the tax years commencing after December 31, 2022, any qualifying entity can opt for an elective payment election if they are eligible for a clean energy tax credit. This unique election allows these credits to be treated as payments towards federal income tax liabilities instead of nonrefundable credits. The value of the credit is first used to offset any tax liability of the entity, with any surplus being refundable.

Procedure for Elective Pay Election

The elective payment election is made annually on your tax return as specified by the IRS. This process involves the submission of any form required to claim the relevant tax credit, a completed Form 3800 (General Business Credit), and any additional information or supporting calculations as instructed in the relevant forms. The process of making an elective payment election involves several steps, including the completion of the required pre-filing registration process.

Determining the Taxable Year

To identify the taxable year, refer to the instructions provided for the annual tax return you are filing. For instance, tax-exempt entities filing Form 990-T must file the return based on the organization’s established annual accounting period. In case the organization does not have an established accounting period, the return should be filed on a calendar-year basis.

Filing Returns Timely

Remember, an elective payment election can only be made on an original, timely filed return, including extensions. This implies that the deadline is the due date (including extensions of time) for the tax return of the taxable year in which the election is made. For most tax exempt and government entities, including Indian tribal governments, this is typically 4.5 months (for instance, May 15 for a calendar year taxpayer) or up to 10.5 months with extensions, following the end of the entity’s tax year.

For more details about Clean Energy Credits, visit IRS.gov/cleanenergy.