Today, the U.S. Department of the Treasury and the IRS released final regulations aimed at expanding access to clean energy tax credits through direct pay, part of the Biden-Harris Administration's Inflation Reduction Act. This move is intended to benefit entities such as state and local governments, Tribes and territories, public school districts, rural electric co-ops, and tax-exempt organizations that previously could not utilize these credits due to limited federal tax liability.
Direct pay allows these groups to access the full value of clean energy incentives, facilitating quicker and more affordable project development. The new guidance offers clarity for entities eligible for direct pay that wish to jointly invest in clean energy projects. This includes partnerships between tax-exempt entities and for-profit developers or collaborations among multiple tax-exempt entities or governments.
U.S. Deputy Secretary of the Treasury Wally Adeyemo stated, "The Biden-Harris Administration is focused on continuing the clean energy investment boom and ensuring all Americans benefit from the growth of this sector. Direct pay is helping more clean energy projects be built quickly and affordably, and American communities are benefitting as a result."
The regulations make modifications to partnership tax rules to clarify how co-owned projects can elect not to be treated as partnerships for tax purposes. This provides additional flexibility since partnerships are generally not eligible for direct pay under the Inflation Reduction Act. By opting out of partnership status collectively, eligible co-owners can use direct pay for their share while others may use transferability.
In response to public comments, the final regulations confirm that eligible co-ownership arrangements can own and operate property generating any Inflation Reduction Act credits where elective pay is applicable. They also allow investments in clean energy projects through noncorporate entities.
