What is Direct Pay (Elective Pay)?

The Inflation Reduction Act introduced and expanded tax credits for clean energy technologies, providing unprecedented policy certainty and opportunity for entities that manufacture, install, and produce clean energy over the next decade. In addition to providing incentives to spur private-sector investment, the Inflation Reduction Act includes game-changing new provisions that will enable tax-exempt and governmental entities—such as states, local governments, Tribes, territories, and nonprofits—to take an active role in building the clean energy economy, lowering costs for working families, and advancing environmental justice.

Thanks to the Inflation Reduction Act’s “elective pay” (often called “direct pay”) provisions, tax-exempt and governmental entities will, for the first time, be able to receive a payment equal to the full value of tax credits for building qualifying clean energy projects. Unlike competitive grant and loan programs, in which applicants may not receive an award, direct pay allows entities to get their payment if they meet the requirements for both direct pay and the underlying tax credit. For more information about using direct pay on projects that are receiving grants and forgivable loans

Applicable entities can use direct pay for 12 of the Inflation Reduction Act’s tax credits, including for generating clean electricity through solar, wind, and battery storage projects; building community solar projects that bring clean energy to neighborhood families; installing electric vehicle (EV) charging infrastructure; and purchasing clean vehicles for state or city vehicle fleets. 

WHO IS ELIGIBLE?

  • 501(c)(3) organizations such as public charities, private foundations, schools, hospitals, houses of worship, and others
  • Religious or apostolic 501(d) organizations
  • All other organizations exempt under section 501(a) of the tax code

How do I apply for direct pay?

Entities wishing to claim direct pay need to complete the following steps:

 

Confirm that the clean energy project you’re building or want to build qualifies for one of the IRA tax credits that are applicable for direct pay. You will need to obtain all necessary documentation for any tax credits and bonuses you want to claim. In general, Treasury and the IRS do not provide personalized tax advice on whether a specific organization’s project or activity is eligible for a tax credit. For more information about clean energy tax credits, visit IRS.gov/Cleanenergy. You may also choose to consult with a tax advisor.

You can only use direct pay after you earn the tax credit. For Investment Tax Credits, you earn the credit during the tax year that your clean energy project is placed in service. In many cases, the tax year corresponds to the calendar year—so if your project is coming online in 2023, your tax year is also often 2023. More information on determining your tax year is available here.

For most tax-exempt and governmental entities, the return for a taxable year is due 4.5 months after the end of that taxable year. For example, if your tax year is the calendar year, and your project is coming online in 2023, your tax return will be due by May 15, 2024. Those without a filing requirement can also receive an automatic 6-month extension. 

You’ll need to register with the IRS and receive a registration number before you can file a tax return and receive payment. In general, each registration number corresponds to one clean energy property in one tax year—you will need to renew the number if you need to use it in other tax years. During the pre-registration process, you will need to provide information about your organization, the credits you want to earn, and your eligible clean energy project in an online portal. More information about pre-filing registration will be available by late 2023.

You’ll need to provide your registration number and make the elective payment selection on your tax return (typically a Form 990-T for most entities that don’t normally file a tax return). You also need to provide additional required documentation and underlying credit forms when you file your return. You can find more filing tips for tax-exempt organizations here.

In general, payments occur after your return is successfully processed. Under the statute, organizations aren’t entitled to the direct payment until the due date of the return. You will receive the payment either electronically or via mail.