Understanding Clean Energy Credits: Elective Payment Election and Its Benefits

The Inflation Reduction Act of 2022 (IRA) has introduced new opportunities for tax-exempt and governmental entities to leverage clean energy tax credits. This includes Indian tribal governments and Alaskan Native Corporations, who can now gain from these credits through elective pay. This article aims to shed light on the process of making elective payment elections and the benefits that come with it.

The Inflation Reduction Act and Clean Energy Tax Credits

The IRA has made it possible for qualifying entities to make an elective payment election for tax years starting after December 31, 2022. This election allows certain credits to be treated as a payment against federal income tax liabilities, rather than a nonrefundable credit. The credit amount will first be used to offset any tax liability of the entity, with any excess being refundable.

Steps to Make a Successful Elective Payment Election

While the steps to making an elective payment election don’t necessarily need to be followed in a specific order, they are crucial to the process.

Firstly, identify and pursue the qualifying project or activity. It’s essential to know which applicable credit you intend to earn and use elective pay for.

Next, determine your tax year, as this will set the due date for your tax return.

You’ll then need to complete pre-filing registration with the IRS. This involves providing information about yourself, the credits you intend to claim, and each eligible project/property that will contribute to the applicable credit. Once completed, the IRS will provide a registration number for each applicable credit property. Remember to complete the pre-filing registration in time to have a valid registration number when you file your tax return.

It’s also important to satisfy all eligibility requirements for the tax credit and any applicable bonus credits for a given tax year. For instance, to claim an energy credit on a solar energy generating project, the project needs to be in service before making an elective payment election. Make sure to have the necessary documentation to substantiate any underlying tax credit, including if bonus amounts increased the credit.

Lastly, file the required annual tax return by the due date (or extended due date) and make a valid elective payment election.

Additional Information

More details about the pre-filing registration process will be available by late 2023. For more information about clean energy tax credits, visit the IRS websites for tribes and clean energy.