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Elective Payments of Credits under the Inflation Reduction Act: Pre-file Registration and Timely Filing Required

Understanding Elective Payments of Credits under the Inflation Reduction Act: The Importance of Pre-file Registration and Timely Filing

In a significant development for tax-exempt and governmental entities, the Inflation Reduction Act of 2022 has ushered in new opportunities to benefit from clean energy tax credits. This is particularly beneficial for entities that were previously unable to utilize these credits. The Act has introduced elective payments, making clean energy tax credits effectively refundable.

Starting from tax years that commence after December 31, 2022, qualifying entities can opt for an elective payment election for their clean energy tax credits. This election allows these credits to be used as a payment against federal income tax liabilities, instead of being a nonrefundable credit. The payment first offsets any tax liability of the entity, with any surplus being refundable.

Who are the Applicable Entities?

The applicable entities typically include tax-exempt organizations, state and local governments, Indian tribal governments, Alaska Native Corporations, the Tennessee Valley Authority, and rural electric cooperatives. Specific eligibility criteria for each type of applicable entity are provided in the resources section.

The Internal Revenue Service (IRS) has issued proposed regulations that outline rules and definitions for elective payments for clean energy tax credits. Temporary regulations have also been issued by the IRS regarding pre-filing registration requirements for taxpayers intending to make an elective payment election.

Pre-filing Registration and Elective Payment Election

Before making an elective payment election on an annual tax return, the pre-filing registration process must be completed and a registration number obtained. Entities not required to return (such as state and local governments and Indian tribal governments) will file Form 990-T to make the elective payment election. The election can only be made on a timely filed return (including extensions). Applicable entities will need their own Employer Identification Number (EIN) or Tax Identification Number (TIN) to complete the pre-filing registration process. They cannot use or borrow the EIN of a related entity. To apply for an EIN online, visit IRS.gov/EIN.

The IRS is working diligently to implement the elective payment process and will provide additional information, including details about the pre-filing registration process, in late 2023.

Additional Resources and Support

For further information on elective pay, the IRS has posted Frequently Asked Questions that cover eligibility, applicable credits, steps for completing pre-file registration, steps for making an election, and other rules. The IRS also offers a series of publications with essential information specifically for various types of applicable entities that may make an elective payment election. These include details on how to make the elective pay election and what steps to take to receive a payment.

The tax-exempt bond community can find answers to many questions at IRS.gov/bonds. For account-specific questions that you can’t find answers to, you can call Customer Account Services at 877-829-5500.

If you know someone who might benefit from the TEB Community Update, feel free to forward this information to them.

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Elective Payments of Credits under the Inflation Reduction Act: Pre-file Registration and Timely Filing Required Tax-exempt and governmental entities, including those that were generally unable to use tax credits previously, can now benefit from clean energy tax credits using new options enabled by the Inflation Reduction Act of 2022. Elective pay makes certain clean energy tax credits effectively refundable. For tax years beginning after December 31, 2022, an applicable entity that qualifies for a clean energy tax credit can make an elective payment election. This election will treat certain credits as a payment against their federal income tax liabilities rather than as a nonrefundable credit. This payment will first offset any tax liability of the entity and any excess will be refundable. Applicable entities generally include tax-exempt organizations, state and local governments, Indian tribal governments, Alaska Native Corporations, the Tennessee Valley Authority and rural electric cooperatives. Specific criteria for each type of applicable entity are included in the resources below. The Internal Revenue Service issued proposed regulations describing rules and definitions concerning elective payments for the clean energy tax credits. The IRS has also issued temporary regulations regarding the pre-filing registration requirements for taxpayers planning to make an elective payment election. The pre-filing registration process must be completed, and a registration number received, prior to making an elective payment election on an annual tax return. Entities for which no such return is required (such as state and local governments and Indian tribal governments) will file Form 990-T to make the elective payment election. An elective payment election may only be made on a timely filed return (including extensions). Applicable entities will need their own Employer Identification Number (EIN) or Tax Identification Number (TIN) to complete the pre-filing registration process. Applicable entities cannot use or borrow the EIN of a related entity. To apply for an EIN online, visit IRS.gov/EIN. The IRS is continuing to work to implement the elective payment process and will provide more information, including about the pre-filing registration process, in late 2023. For more information on elective pay, the IRS has posted Frequently Asked Questions that discuss eligibility, applicable credits, steps for completing pre-file registration, steps for making an election, and other rules. Additionally, the IRS has a series of publications with key information specifically for various types of applicable entities that may make an elective payment election, including information on how to make the elective pay election and what to do to receive a payment: Elective Pay Overview, Publication 5817 (PDF) Rural Electric Cooperatives, Publication 5817-A (PDF) U.S. Territorial Governments, Publication 5817-B (PDF) Alaska Native Corporations, Publication 5817-C (PDF) Tax-Exempt Organizations, Publication 5817-D (PDF) State and Local Government, Publication 5817-E (PDF) Indian Tribal Governments, Publication 5817-F (PDF) Clean Energy Tax Incentives: Elective Pay Eligible Tax Credits, Publication 5817-G (PDF) The tax-exempt bond community can find answers to many questions at IRS.gov/bonds. If you’re unable to find answers to account-specific questions, call Customer Account Services at 877-829-5500. If you know someone who wants to subscribe to the TEB Community Update, forward this message to them to subscribe. To subscribe to other IRS news, click IRS Newsletters or IRS Social Media. This message was distributed automatically from the TEB Community Update mailing list. Please do not reply to this message.

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