IRS releases rules for tax-exempt entities to monetize IRA credits

Executive summary: Proposed regulations

Proposed regulations include instrumentalities into the definition of an applicable entity, removing any doubt that public colleges, or other similar institutions, could benefit from Inflation Reduction Act credits. While the guidance is mostly in proposed form, applicable entities may rely on the guidance for elective payments of applicable credit amounts after Dec. 31, 2022. The rules require a significant amount of reporting and pre-filing registration requirements. Applicable entities need to make sure they comply before the deadlines lapse, as there is no 9100 relief available.

Elective payment under section 6417

On June 21, 2023, the IRS officially released temporary and proposed regulations under section 6417 that put forth the IRS’ guidance on the elective payment election for certain credits. Section 6417 was added to the Internal Revenue Code on Aug. 16, 2022, by section 13801(a) of Public Law 117–169, 136 Stat. 1818, 2003, commonly referred to as the Inflation Reduction Act of 2022 (IRA). Section 6417 allows entities that are not normally subject to Federal income taxes to monetize certain Federal tax credits under the IRA. Under section 6417, applicable entities can elect to treat the qualifying credits as a payment against tax imposed by subtitle A (i.e., Federal income taxes) for the applicable tax year in an amount equal to the qualifying credit. For more insights on section 6417 read RSM’s Tax-exempt organizations: Clean energy incentives and direct pay.   

Applicable entities include the following under section 6417(d)(1)(A):

1. Any organization exempt from the tax imposed by subtitle A
   1. By reason of section 501(a) of the Code or
   2. Because it is the government of any U.S. territory or a political subdivision thereof
2. Any state, the District of Columbia or political subdivision thereof
3. An Indian tribal government or a subdivision thereof
4. Any Alaska Native Corporation
5. The Tennessee Valley Authority
6. Any corporation operating on a cooperative basis that is engaged in furnishing electric energy to persons in rural areas or
7. An agency or instrumentality of any applicable entity described in paragraphs (1)(b), (2) or (3)

A welcomed addition was the inclusion of instrumentalities that will eliminate the concern that public universities would be excluded from taking advantage of the eligible credit.

The credits that can be monetized under section 6417 include the following 12 credits:

• Section 30C (alternative fuel vehicle refueling property)
• Section 45 (renewable electricity production)
• Section 45Q (carbon capture equipment)
• Section 45U (zero-emission nuclear power production)
• Section 45V (production of clean hydrogen)
• Section 45W (qualified commercial vehicles)
• Section 45X (advanced manufacturing production)
• Section 45Y (clean electricity production)
• Section 45Z (clean fuel production)
• Section 48 (clean energy property)
• Section 48C (qualifying advanced energy project)
• Section 48E (clean electricity investment)

Applicable entities must make this election on an original return filed no later than the due date, including extensions of time for the tax year the entity would determine the credit. Entities that are not normally required to file an annual tax return with the IRS (such as entities located in the U.S. territories), must use the return they would be required to file if they were located in the United States, or if no such return is required (such as for state, District of Columbia, local or Indian tribal governmental entities), the Form 990–T must be filed. It is critical to make the elective payment election on a timely return as there is no 9100 relief available for an elective payment election that is not timely filed.

In order to take advantage of section 6417, applicable entities need to have a registration number. An applicable entity must complete the pre-filing registration process electronically through the IRS electronic portal and in accordance with the instructions provided therein to obtain a registration number.

The proposed regulations require an applicable entity to provide the following information to the IRS to complete the pre-filing registration process:

• The applicable entity's general information, including its name, address, entity’s identification number and type of legal entity.
• The entity's tax year.
• The type of annual tax return(s) normally filed by the applicable entity or that the applicable entity does not normally file an annual tax return with the IRS.
• The type of applicable credit(s) for which the applicable entity intends to make an elective payment election.
• For each applicable credit, a list of each applicable credit property that the applicable entity intends to use to determine the credit for which the applicable entity intends to make an elective payment election.
• The name of a contact person for the applicable entity with a properly executed Form 2848, Power of Attorney and Declaration of Representative.
• A penalties of perjury statement, effective for all information submitted as a complete application, and signed by a person with personal knowledge of the relevant facts that are authorized to bind the registrant; and
• Any other information the IRS deems necessary that is provided in guidance, instructions, or required by the IRS electronic portal.

After receiving the required information for the pre-filing registration, the IRS will review the information provided and will issue the registration number. The applicable entities will need a registration number for each applicable credit property. A registration number is only good for the tax year obtained. There is an affirmative duty to update the registration (or may need to submit a new registration) to reflect new facts.

It is important to note that completion of the pre-filing registration requirements and receipt of a registration number does not, by itself, guarantee the taxpayers' eligibility to receive a payment under section 6417. However, failure to follow these pre-filing registration requirements will render elections ineffective.

Contained in the proposed regulations, there is a rule that applicable entities cannot make an elective payment election on any credit purchased under section 6418. In other words, tax-exempt entities cannot purchase IRA credits and then make the elective payment election on the purchased credit. There is also a special rule for investment-related credit property acquired with income, including income from certain grants and forgivable loans to prevent the credit amount and the restricted tax-exempt amount from exceeding the cost of the investment-related credit property.

Washington National Tax takeaway

It is great news that the IRS included agency or instrumentalities into the definition of an applicable entity, removing any doubt that public colleges, or other similar institutions, could benefit from the IRA credits. The rules for pre-filing registration and making elective payments are complex and require a significant amount of reporting. Taxpayers should carefully consider these rules when modeling monetization options for certain energy credits and comply before deadlines lapse as there is no 9100 relief available.

While the guidance is mostly in proposed form, applicable entities may rely on the guidance for elective payments of applicable credit amounts after Dec. 31, 2022. Please talk to your advisor on how this guidance can factor into your clean energy activities.