Cash is always better than credit, and under recent revisions to the Internal Revenue Code, certain tax-exempt entities may receive cash payment of their tax credits instead of nonrefundable credit. This direct pay option is particularly enticing for tax-exempt entities, which previously were unable to utilize credits since they had little-to-no tax liability against which the credits could be applied.
Section 6417 of the Internal Revenue Code was added by the Inflation Reduction Act of 2022 (IRA). The section provides that eligible taxpayers may make an election to claim certain clean energy credits even though they have no tax liability. The amount of the credit is then treated as a payment of tax and any overpayment will be refunded.
Applicable entities include tax-exempt organizations, U.S. states and their political subdivisions, Indian tribal governments, Alaska Native Corporations, the Tennessee Valley Authority, and rural electric cooperations. Guidance issued by the Internal Revenue Service indicates that all organizations under section 501(c) are eligible, including public charities and private foundations, as well as religious or apostolic organizations in section 501(d).
The applicable credits eligible for direct pay are:
- Energy Credit- Section 48
- Clean Electricity Investment Credit – Section 48E
- Renewable Electricity Production Credit – Section 45
- Clean Electricity Production Credit Section – 45Y
- Commercial Clean Vehicle Credit Section – 45W
- Zero-emission Nuclear Power Production Credit – Section 45U
- Advanced Manufacturing Production Credit – Section 45X
- Clean Hydrogen Production Credit – Section 45V
- Clean Fuel Production Credit – Section 45Z
- Carbon Oxide Sequestration Credit – Section 45Q
- Credit for Alternative Fuel Vehicle Refueling / Recharging Property – Section 30C
- Qualifying Advanced Energy Project Credit – Section 48C
To make the election, a taxpayer must identify the qualifying project and satisfy the eligibility requirements for the specific tax credit for a given tax year. Generally, meeting the credit requirements is enough, but some have service date restrictions to consider. Once the credit requirements are met, the taxpayer files the required annual return with the valid election.
Tax-exempt entities that put a qualifying project into service can now benefit from this election. Prior to the IRA, such organizations were unable to utilize nonrefundable credits since they generally had no tax liability. By creating this payment option if a credit-qualifying project is undertaken, a tax-exempt organization will receive the credit and be able to put the money to use in other areas of their business.
