The Internal Revenue Service recently issued proposed regulations and frequently asked questions describing rules for applicable entities that earn certain clean energy credits and choose to make an elective payment election and rules for eligible taxpayers that elect to transfer certain credits to unrelated parties.
For tax years beginning after Dec. 31, 2022, applicable entities can choose to make an elective payment election, which will treat certain credits as a payment against their federal income tax liabilities rather than as a nonrefundable credit. This payment will first offset any tax liability of the entity and any excess will be refundable.
Applicable entities generally include tax-exempt organizations, state and local governments, Indian tribal governments, Alaska Native Corporations, the Tennessee Valley Authority and rural electric cooperatives. All other taxpayers may elect to be treated as an applicable entity for a limited number of credits.
Also, for tax years beginning after Dec. 31, 2022, certain eligible taxpayers (generally taxpayers that are not applicable entities) can make an election to transfer all or a portion of an eligible credit to unrelated taxpayers for cash payments.
The unrelated taxpayers are then allowed to claim the transferred credits on their tax return. The cash payments are not included in gross income of the eligible taxpayer and are not deductible by the unrelated taxpayers.
Temporary regulations were also issued this past Wednesday, providing rules that relate to a mandatory IRS pre-filing registration process, which will be through an electronic portal. The pre-filing registration process must be completed, and a registration number received, prior to making an elective payment election or an election to transfer eligible credits.
The process also applies prior to making an elective payment election related to advanced manufacturing investment credit amounts under the CHIPS Act of 2022. Proposed regulations were also issued last week describing other issues related to the advanced manufacturing investment credit.