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.

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