On March 5, 2024, the IRS issued final regulations under Internal Revenue Code Section 6417 (the “Final Regulations”) with respect to energy tax credits which are directly payable to State and local governmental entities as well as to 501(c)(3) organizations (“Applicable Entities”) as a result of the enactment of the Inflation Reduction Act of 2022 (the “Act”).^[1]

This article, which follows and updates our May 8, 2023 and August 29, 2023 client advisories describing the Act’s provision of such payable tax credits for clean energy investments (also referred to as “refundable investment tax credits” or “refundable ITCs”), and the initially proposed regulations thereunder (the “Proposed Section 6417 Regulations”), will briefly recap the Act’s refundable ITC provisions and summarize the differences between the Final Regulations and the Proposed Section 6417 Regulations.

The Act makes refundable ITCs, along with other energy credits, available to Applicable Entities as one-time cash payments. An Applicable Entity can claim a refundable ITC for up to 30% of its clean energy investment if it meets certain specified wage and apprenticeship requirements. Additional bonuses are available for using domestic content and locating the investment in a low-income community. The Act, however, also applies a 15% “haircut” to the amount of the refundable ITC if and to the extent proceeds of tax-exempt bonds are to be used by the Applicable Entity to finance all or a portion of the capital costs of the clean energy project.

Who Can Elect to Receive Refundable ITCs

The Final Regulations include some important clarifications and updates to the definition of Applicable Entities that can elect to receive refundable ITCs:

1. They clarify that Applicable Entities include all organizations that are exempt from income tax “by reason of subchapter F of chapter 1 of subtitle A,” which includes all organizations that are exempt under Sections 501 to 530, not just Section 501(c)(3) entities.
2. While partnerships and S corporations are still generally excluded from Applicable Entities, certain concurrently proposed Treasury regulations^[2] would allow some specified non-corporate business entities to make an election which would allow them to be Applicable Entities and claim the refundable ITCs.
3. Finally, whereas the Proposed Section 6417 Regulations only allowed consolidated group members to make refundable ITC elections if the group had as its common parent an Alaska Native Corporation, the Final Regulations expand this rule to include groups with any Applicable Entity as the common parent.

In addition to providing for refundable ITCs, the Act also allowed for the sale of energy tax credits. The Final Regulations continue to maintain the IRS’s position from the Proposed Section 6417 Regulations that refundable ITCs cannot be sold or otherwise transferred (i.e., both that transferred credits cannot be claimed for a refundable ITC and that refundable ITCs cannot be transferred to another claimant). However, the IRS concurrently issued Notice 2024-27 requesting comments by December 1, 2024 on how the two regimes could interact, so there could be future developments to allow the combined sale and refundable claim of energy tax credits in some cases.

Refundable ITC Election Process

While a refundable ITC election must be made on an initial filing of a tax return, and cannot generally be made or revoked on an amended tax return, the Final Regulations have added two important exceptions for amendments:

1. Electing taxpayers can file an amended return to alter the amount of the refundable ITC claimed on an original return.
2. Taxpayers can make use of Section 9100 relief, for the making of a late federal tax election, if available, to make an election in the six months following the due date of a properly filed tax return on which the election could have been, but was not, made.

The Final Regulations also confirm that, for Applicable Entities that are only filing a federal income tax return to make the election (e.g., State and local governmental entities), the initial due date is the 15^th day of the fifth month after the end of the governmental entity’s taxable year. As the automatic six-month extension from the Proposed Section 6417 Regulations is still available, the deadline becomes November 15^th for such Applicable Entities if they use a calendar year for other tax and financial accounting purposes.

Other Relevant Rules

There is a “no excess benefit rule” for energy projects that limits refundable ITCs so that an Applicable Entity does not receive, with respect to an energy project, refundable ITCs plus other grants and forgivable loans for a total amount greater than the project’s cost. The Final Regulations clarify that (i) if a “haircut” is applied to the refundable ITC due to funding with tax-exempt bonds, only the post-haircut amount is used for this calculation, (ii) a grant received after the acquisition of the project will not be included unless it was virtually assured of being received at the time of acquisition, and (iii) the determination of whether a grant or loan is received with respect to a specific project is made at the time the grant is received or the loan is approved.

The Final Regulations will take effect on May 10, 2024.

The preceding is a brief overview of the Final Regulations with respect to refundable ITCs. 

[1] H.R. 5376, 117th Cong. (2022).

[2] Election To Exclude Certain Unincorporated Organizations Owned by Applicable Entities From Application of the Rules on Partners and Partnerships, Fed. Reg. 89 Fed. Reg. 27613 (March 11, 2024). These proposed regulations, which relate to Internal Revenue Code Section 761(a), can be found at https://www.federalregister.gov/documents/2024/03/11/2024-04606/election-to-exclude-certain-unincorporated-organizations-owned-by-applicable-entities-from, with corrections posted at https://www.federalregister.gov/documents/2024/04/08/2024-07307/election-to-exclude-certain-unincorporated-organizations-owned-by-applicable-entities-from.