How Tax-Exempt Entities Can Get the New Cash-Based Green Energy Credits

The Inflation Reduction Act (IRA) greatly expanded energy tax credits, including offering cash in lieu of tax credits to tax-exempt organizations through a new direct payment election.

In June 2023, the IRS issued proposed regulations providing key definitions and procedural guidelines for these benefits for tax-exempt organizations. The final regulations — which are part of Section 6417 —were issued on March 11, 2024.

Key provisions

Due date requirements

Certain entities are exempt from filing federal income tax returns, including states, municipalities, and many other tax-exempt entities. To obtain the IRA benefits, many of these entities will have to file Form 990-T for the first time.

Generally, the deadline for filing Form 990-T is the 15th day of the fifth month following the applicable entity’s required year-end. Both the proposed and now final regulations allow an automatic paperless six-month extension to file Form 990-T in the absence of guidance instructing an applicable entity with no federal income tax return filing requirement on how to file an extension.

The proposed regulations required an applicable entity filing Form 990-T solely to make an IRA direct payment election must adopt a tax year based on the annual accounting period used in keeping its books. The final regulations allow entities to elect to file Form 990-T using a fiscal year or calendar year. To make this election, entities must maintain adequate books and records and be able to reconcile their regular books of account with their chosen tax year.

The election to use a calendar year under the final regulations is noteworthy for two reasons:

• Entities electing to file Form 990-T based on a calendar year can make a direct payment election with respect to eligible property placed in service at any point during 2023. Under the proposed regulations, a fiscal-year filer could only make a direct payment election on eligible property placed in service on or after the date on which its fiscal year began in 2023. For example, a filer using a June 30 fiscal year could only make a direct payment election under the proposed regulations for property placed in service on or after July 1, 2023.
• Filers adopting a calendar year may be able to accelerate tax credit refunds. Entities are not entitled to a direct payment refund until the due date of their return. Thus, using a calendar year rather than a June 30 fiscal year (for example) may expedite the IRS refund by moving up the return due date.

Investment-related credit property acquired with tax-exempt grants or forgivable loans

Entities using proceeds from tax-exempt grants or forgivable loans for purchasing, constructing, reconstructing, erecting, or otherwise acquiring investment-related credit property may be required to reduce their direct payment election credits.

Generally, determining whether a tax-exempt grant was made for the specific (i.e., restricted) purpose of acquiring investment-related credit property happens when the grant is awarded. Grants awarded after an entity’s acquisition of investment-related credit property do not meet the specific purpose test unless approval of the grant was perfunctory, and the amount of the grant was virtually assured at the time of application. Determining whether a forgivable loan was made for the specific purpose of acquiring investment-credit related property is made when the loan is approved.

The specific purpose test is not met if — for example — acquiring investment-related credit property is made using the entity’s general funds, or if the entity’s use of grant or forgivable loan monies is not restricted to acquiring specific investment-related credit property or could be used for other purposes.

The final regulations say if the so-called specific purpose test is met, the amount of the reduction is the excess of:

• The sum of any restricted tax-exempt amounts plus the applicable credit otherwise related to that investment-related credit property, over
• The cost of the investment-related credit property.

The following example illustrates the application of this credit reduction rule:

• School district A receives a $400,000 tax-exempt grant from a federal agency to purchase an electric school bus.
• District A purchases the bus for $400,000. A’s basis in the bus is $400,000.
• The bus qualifies for the maximum Section 45W credit — $40,000. However, because the restricted tax-exempt grant plus the Section 45W credit exceeds the bus’s cost, A’s Section 45W credit is reduced by the amount necessary so the total of the Section 45W credit plus the restricted tax-exempt amount equals the cost of the bus.
• A’s Section 45W credit is therefore reduced by $40,000 to zero.

Original return requirement

The final regulations require direct payment elections to be made on an original or superseding return filed before the original or extended due date. The election cannot be made (or withdrawn):

• On an amended return,
• Through a partnership administrative request under Section 6227, or
• Through a request for private letter ruling.

Despite this restriction, the final regulations made key changes to the proposed regulations entities may find helpful:

• Entities can file an amended return or Section 6227 administrative request to correct a numerical error made on an otherwise timely filed direct payment election.
• Entities that did not file an extension and timely filed their original returns without the direct payment election may be eligible for late-election relief. Entities can take corrective action by filing a direct payment election on an amended return with “filed pursuant to Section 301.9100-2” marked at the top of the document. The amended return must be filed within six months of the original due date of the return for the corrective action to be valid.

Definition of applicable entity: exempt organization

The final regulations clarify the direct payment election is available to exempt organizations subject to IRC Sections 501 through 530, including:

• 501(c) organizations (e.g., charities, social service organizations, nonprofit schools, higher education institutions, health care organizations, arts and cultural organizations, religious organizations, etc.),
• Private foundations,
• Farmers’ cooperatives,
• Shipowners’ protection and indemnity associations,
• Political organizations,
• Certain homeowners’ associations, and
• Certain savings entities.

The proposed regulations previously limited this scope to entities exempt under Section 501(a).

Election to exclude certain partnerships from Subchapter K

Generally, a partnership does not qualify as an applicable entity and is not permitted to make a direct payment election. This could prevent entities from investing in partnerships that generate energy credits.

To ease this restriction, the IRS issued proposed regulations with the final Section 6417 regulations allowing certain partnerships to elect out of Subchapter K under the Section 761 regulations. By making this election, partners who are applicable entities may be able to make a direct payment election on their share of the partnership’s applicable tax credits.

To qualify, a partnership must:

• Be owned by one or more applicable entities.
• Enter into a joint operating agreement on the applicable credit property where the members reserve the right separately to take in kind or dispose of their pro rata shares of the electricity produced, extracted, or used, or any associated renewable energy credits or similar credits.
• Be organized exclusively to jointly produce electricity from its applicable credit property (pursuant to a joint operating agreement).
• Make a direct payment election for the applicable credits to one or more partners’ share of the applicable credit property.

This relief is limited to:

• The renewable electricity production credit under Section 45(a)
• The zero-emission nuclear power production credit under Section 45U(a)
• The clean electricity production credit under Section 45Y(a)
• The energy credit under Section 48
• The clean electricity investment credit under Section 48E

How we can help

The Inflation Reduction Act creates major opportunities for tax-exempt organizations to cash in on green energy tax credits. The inclusion of tax-exempt organizations in the realm of refundable federal credits marks a significant expansion of the federal incentives aimed at promoting green energy investment across the United States.

CLA’s energy tax services team can help your organization navigate the IRA and capture available benefits, including:

• Investment and production tax credit eligibility and analysis
• Credit modeling and IRR/ROI analysis
• Investment tax credit cost segregation and computations
• Assistance with IRS registrations and credit allocations
• Structuring and advisory services in connection with credit transfer transactions
• IRS credit reporting and compliance
• Loan and grant application writing and consulting

Contact Us

Seeking cash for green energy projects? Complete the form below to connect with CLA.