Understanding Clean Energy Credits and Elective Pay

The Inflation Reduction Act of 2022 (IRA) has introduced new opportunities for tax-exempt and governmental entities to leverage clean energy tax credits. The Act allows these organizations to benefit from specific clean energy tax credits through a mechanism known as elective pay. Starting from tax years that begin after December 31, 2022, eligible entities that qualify for a clean energy tax credit can opt for an elective payment election. This choice allows these credits to be treated as a payment against their federal income tax liabilities, rather than as a nonrefundable credit. Initially, the credit amount will offset any tax liability of the entity, with any surplus being refundable.

How to Opt for an Elective Pay Election

The process of making an elective payment election is carried out on your annual tax return, as outlined by the IRS. This process involves the completion of any form needed to claim the relevant tax credit (source credit forms), a filled-out Form 3800, General Business Credit (or its successor), and any additional information, including supporting calculations, as required by the instructions to the relevant forms. To successfully make an elective payment election, several steps need to be completed, including the necessary pre-filing registration process.

The term ‘annual tax return’ encompasses:

– For individuals typically required to file an annual tax return with the IRS, such annual return (including Form 990-T for organizations with unrelated business income tax or a proxy tax under section 6033(e));
– For individuals not usually required to file an annual tax return with the IRS (such as taxpayers located in the territories), the return they would need to file if they were not situated in the territories, or, if no such return is required (such as for State, local, or Indian tribal governmental entities), the Form 990-T Exempt Organization Business Income Tax Return.

Filing your return electronically is highly recommended.

Each entity opting for an elective payment election must possess a unique EIN. More information about obtaining an EIN can be found at IRS.gov/ein.

Determining the Taxable Year

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

Timely Filing of Your Return

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 for 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 example, May 15 for a calendar year taxpayer) (or up to 10.5 months with extensions) following the end of the entity’s tax year.

An original return includes a superseding return filed on or before the due date (including extensions). No election is allowed to be made on an amended return or by filing an administrative adjustment request under section 6227 of the Code. There is no relief available under §§ 301.9100-1 through 301.9100-3 of the Procedure and Administration Regulations (26 CFR part 301) for an elective payment election that is not timely filed.

Additional information about Clean Energy Credits can be accessed at IRS.gov/cleanenergy.