Understanding Clean Energy Credits and Their Eligibility

The Inflation Reduction Act of 2022 (IRA) has opened up new avenues for tax-exempt and governmental entities to leverage clean energy tax credits. This includes Indian tribal governments and Alaskan Native Corporations, who can use these credits to offset their federal income tax liabilities. This article aims to provide a comprehensive understanding of clean energy tax credits, their eligibility criteria, and how to make elective payment elections.

Benefits of the Inflation Reduction Act of 2022

The IRA has introduced an option for applicable entities that qualify for clean energy tax credits to make an elective payment election. This provision comes into effect for tax years beginning after December 31, 2022. The election allows these entities to use certain credits as payments against their federal income tax liabilities instead of nonrefundable credits. The credit amount will first be used to offset any tax liability of the entity, with any excess being refundable.

Who is Eligible?

Entities that can benefit from this provision include certain tax-exempt organizations, state and local governments, Indian tribal governments, Alaska Native Corporations, the Tennessee Valley Authority, and rural electric cooperatives.

Indian tribal governments, their political subdivisions, or any agency or instrumentality thereof are eligible for elective pay. The term “Indian tribal government” refers to the recognized governing body of any Indian or Alaska Native tribe, band, nation, pueblo, village, community, component band, or component reservation, as listed in the Federal Register by the Department of the Interior under the Federally Recognized Indian Tribe List Act of 1994. These tribal entities are also eligible if they are exempt from tax under section 501(a).

Alaska Native Corporations, as defined in section 3 of the Alaska Native Claims Settlement Act (43 U.S.C. 1602(m)), are also eligible for the elective payment election. However, Settlement Trusts are not eligible based on affiliation with an Alaska Native corporation. They do qualify if the Settlement Trust has exempt status under section 501(a) and has received a determination letter from the IRS recognizing any such tax-exempt status.

Property Ownership and Eligibility

To be eligible, the applicable entity must generally own the property that generates the eligible credit or conduct the activities that give rise to the underlying eligible credit. This ownership can take various forms. For instance, an applicable entity could directly own the property, own it through a disregarded entity, or own an undivided interest in an ownership arrangement treated as a tenancy-in-common or pursuant to a joint operating arrangement that has properly elected out of subchapter K of chapter 1 of the Code (subchapter K) under section 761.

For more information about elective pay, refer to Publication 5817-F (Indian Tribal Governments) and Publication 5817-C (Alaska Native Corporations).

Additional information about clean energy tax credits can be found at irs.gov/tribes and irs.gov/cleanenergy.