IRS Issues Final Regs and Other Guidance on Elective Payments of Clean Energy Credits

(Parker Tax Publishing March 2024)

The IRS issued final regulations concerning the election under Code Sec. 6417 to treat the amount of certain tax credits as a payment of federal income tax, final regulations concerning elective payments of the advanced manufacturing investment credit, and also issued proposed regulations to allow certain unincorporated organizations that are organized exclusively to produce electricity from certain property to be excluded from the application of partnership tax rules so that one or more of their members can make a Code Sec. 6417 election. In addition, the IRS requested comments on any situations in which an elective payment election could be made for a credit that was purchased in a transfer for which an election under Code Sec. 6418(a) is made. T.D. 9988; T.D. 9989; REG-101552-24; Notice 2024-27.

Background

The Inflation Reduction Act of 2022 (IRA) (Pub. L. 117-169) established and expanded various tax credits to incentivize clean energy and energy efficiency. The IRA also enacted Code Sec. 6417 to allow certain entities (i.e., "applicable entities") to make an election to treat the amount of certain tax credits as a payment of federal income tax (i.e., an elective payment election).

Under Code Sec. 6417, applicable entities (generally, tax-exempt organizations, state, local and tribal governments, Alaska Native Corporations, the Tennessee Valley Authority, and rural electric cooperatives) can make an elective payment election with respect to an "applicable credit." Under Code Sec. 6417(b), the applicable credits that are eligible for the elective payment election are:

(1) the energy credit under Code Sec. 48;

(2) the clean electricity investment credit under Code Sec. 48E;

(3) the renewable electricity production credit under Code Sec. 45;

(4) the clean electricity production credit under Code Sec. 45Y;

(5) the commercial clean vehicle credit under Code Sec. 45W;

(6) the zero-emission nuclear power production credit under Code Sec. 45U;

(7) the advanced manufacturing production credit under Code Sec. 45X;

(8) the clean hydrogen production credit under Code Sec. 45V;

(9) the clean fuel production credit under Code Sec. 45Z;

(10) the carbon oxide sequestration credit under Code Sec. 45Q;

(11) the credit for alternative fuel vehicle refueling/recharging property under Code Sec. 30C; and

(12) the qualifying advanced energy project credit under Code Sec. 48C.

In the case of three of the above credits - the carbon oxide sequestration credit, the credit for production of clean hydrogen, and the advanced manufacturing production credit - Code Sec. 6417(d)(1) allows taxpayers that are not "applicable entities" to elect to be treated as an applicable entity for purposes of the elective payment election.

Special rules for partnerships and S corporations that hold directly a facility or property for which an applicable credit is determined are provided in Code Sec. 6417(c). If a partnership or S corporation makes an elective payment election with respect to any applicable credit, Code Sec. 6417(c)(1) provides that: (1) the IRS will make a payment to the partnership or S corporation equal to the applicable credit amount; (2) Code Sec. 6417(e) is applied with respect to the applicable credit before determining any partner's distributive share, or S corporation shareholder's pro rata share, of such applicable credit; (3) any applicable credit amount with respect to which the election in Code Sec. 6417(a) is made is treated as tax-exempt income for purposes of Code Secs. 705 and 1366; and (4) a partner's distributive share of such tax-exempt income is based on such partner's distributive share of the otherwise applicable credit for each tax year (an S corporation shareholder's share of tax exempt income is based on the shareholder's pro rata share). Code Sec. 6417(c)(2) provides that, in the case of any facility or property held directly by a partnership or S corporation, no election by any partner or shareholder is allowed under Code Sec. 6417(a) with respect to any applicable credit determined with respect to such facility or property.

Under a denial of double benefit rule in Code Sec. 6417(e), which applies to partnerships and S corporations under Code Sec. 6417(c)(1)(B), when an elective payment election is made with respect to an applicable credit, such credit is reduced to zero and, for any other purposes of the Code, is deemed to have been allowed to such entity for such tax year.

In June 2023, the IRS published proposed regulations (REG-101607-23) to provide guidance on elective payment elections (June 2023 proposed regulations). The proposed regulations included Prop. Reg. Sec. 1.6417-5, which contained proposed rules identical to the temporary regulations at Temp. Reg. Sec. 1.6417-5T. The temporary regulations provided guidance on the mandatory information and registration requirements for elective payment elections.

Advanced Manufacturing Investment Credit

Code Sec. 48D was added to the Code in August 2022 by Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act of 2022 (Pub. L. 117-167). Code Sec. 48D established the advanced manufacturing investment credit (Code Sec. 48D credit) and Code Sec. 48D(d) allows taxpayers (other than partnerships and S corporations) to elect to treat the amount of the Code Sec. 48D credit determined under Code Sec. 48D(a) as a payment against their federal income tax liabilities. Code Sec. 48D(d) also provides special rules relating to elective payments to partnerships and S corporations and directs the IRS to provide rules for making elections under Code Sec. 48D and to require information or registration necessary for purposes of preventing duplication, fraud, improper payments, or excessive payments under Code Sec. 48D. Code Sec. 48D applies to qualified property placed in service after December 31, 2022, and, for any property the construction of which began prior to January 1, 2023, only to the extent of the basis thereof attributable to the construction, reconstruction, or erection of such qualified property after August 9, 2022 (the date of enactment of the CHIPS Act).

In March 2023, the IRS issued proposed regulations (REG-120563-22) to provide rules to implement the Code Sec. 48D credit (March 2023 proposed regulations). Prop. Reg. Sec. 1.48D-6 of the March 2023 proposed regulations set forth the general requirements for making an elective payment election under Code Sec. 48D(d), and the specific requirement that an eligible taxpayer, partnership, or S corporation would need to comply with the registration procedures in the proposed regulations prior to any amount being treated as a payment under Code Sec. 48D(d)(1) or (d)(2)(A)(i)(I).

Final Regulations, Proposed Regulations, and Request for Comments

On March 5, the IRS issued final regulations on elective payment elections under Code Sec. 6417 (T.D. 9988). The IRS also issued final regulations concerning elective payment elections of the advanced manufacturing credit (T.D. 9989). In addition, the IRS issued proposed regulations to allow certain unincorporated organizations that are organized exclusively to produce electricity from certain property to be excluded from the subchapter K partnership tax rules so that one or more of their members can make an elective payment election. Finally, the IRS issued Notice 2024-27, the IRS requested comments on situations in which an elective payment election could be made for a credit that was purchased in a transfer for which an election under Code Sec. 6418(a) is made (i.e., "chaining").

T.D. 9988

The final regulations in T.D. 9988 adopt the June 2023 proposed regulations with modifications in response to practitioners' comments. The final regulations also removed the temporary regulations in Temp. Reg. Sec. 1.6417-5T.

The June 2023 proposed regulations provided rules for electing taxpayers that are partnerships or S corporations in Prop. Reg. Sec. 1.6414-4. Prop. Reg. Sec. 1.6417-4(c)(1) provided that, if a partnership or S corporation makes an elective payment election: (1) the IRS will make a payment to such partnership or S corporation in the amount of the credit determined; (2) before determining a partner's distributive share or shareholder's pro rata share of any applicable credit, the applicable credit is reduced to zero; (3) any amount received with respect to such elective payment election is treated as tax exempt income; (4) a partner's distributive share of such tax exempt income is equal to such partner's distributive share of the otherwise applicable credit; and (5) such tax exempt income is treated as received or accrued, including for purposes of Code Secs. 705 and 1366, as of the date the applicable credit is determined. Prop. Reg. Sec. 1.6417-4(c)(2) and Prop. Reg. Sec. 1.6417-4(c)(3) provided rules addressing allocations of tax exempt income received by an upper-tier partnership from a lower-tier partnership. Prop. Reg. Sec. 1.6417-4(d) provided that a partnership or S corporation must compute the amount of the applicable credit allowable as if an elective payment election were not made and without regard to the limitations in Code Sec. 38(b) and (c) and Code Sec. 469 because those provisions apply at the partner or S corporation shareholder level. Because there were no comments related to Prop. Reg. Sec. 1.6417-4(c) or Prop. Reg. Sec. 1.6417-4(d), these provisions were adopted without change in the final regulations.

The June 2023 proposed regulations provided that an elective payment election must be made on an original return filed no later than the due date for the original return for the tax year for which the applicable credit is determined. Prop. Reg. Sec. 1.6414-2(b)(ii) stated that no elective payment election may be made "or revised" on an amended return or by filing an administrative adjustment request (AAR). In response to practitioners' comments, the final regulations remove the words "or revised" in order to allow a numerical error with respect to a properly claimed elective payment election to be corrected on an amended return or by filing an AAR. This clarification is intended to address situations in which a taxpayer intended to make an elective payment election but made a reporting error with respect to an element of a valid election (for example, miscalculating the amount of the credit on the original return or making a typographical error in the process of inputting a registration number), and to allow the taxpayer to correct any errors that would result in a disallowance of the election or to correct an excessive payment before an excessive payment determination is made by the IRS. However, the IRS clarified that this provision cannot be used to revoke an election or to make an election for the first time on an amended return.

The final regulations also modify the proposed regulations to permit an extension of time under Reg. Sec. 301.9100-2(b) to allow for an automatic six-month extension of time from the due date of the return (excluding extensions) to make the election prescribed in Code Sec. 6417(d)(3), which provides relief for applicable entities or electing taxpayers who have a filing obligation and file by the due date of the return. The elective payment election is a statutory election because its due date is prescribed by statute. As such, the section 9100 relief procedures apply only insofar as the late election is being filed pursuant to Reg. Sec. 301.9100-2(b), which requires that the taxpayer timely filed its return for the year the election should have been made. Relief under this provision applies only to taxpayers that have not received an extension of time to file a return after the original due date. Taxpayers eligible for this relief must take corrective action under Reg. Sec. 301.9100-2(c) within the six-month extension period and follow the procedural requirements of Reg. Sec. 301.9100-2(d).

The IRS did not adopt practitioners' requests to allow for quarterly elections and payments in order for the applicable credits to be used against estimated tax payments, even though the elective payment is not deemed to occur until the later of the due date or filing date of the applicable tax return. The IRS stated that Code Sec. 6417(d)(4) generally requires a single payment and clearly states the timing of when the payment is treated as made, which is, at the earliest, the return due date (determined without extensions).

T.D. 9989

The final regulations in T.D. 9989 retain the basic approach and structure of the June 2023 proposed regulations with certain revisions in response to comments received.

Similar to the elective payment final regulations in T.D. 9988, the final regulations in T.D. 9989 modify the limitations for making an elective payment election in Prop. Reg. Sec. 1.48D-6(c)(2) in order to allow a taxpayer who intended to make an elective payment election, but made a reporting error with respect to an element of a valid election (for example, miscalculating the amount of the credit on the original return or making a typographical error in the process of inputting a registration number), to correct any errors that would result in disallowance of the election or to correct an excessive payment before an excessive payment determination is made by the IRS. The final regulations also modify the proposed regulations to permit an extension of time under Reg. Sec. 301.9100-2(b) to allow for an automatic six-month extension of time from the due date of the return (excluding extensions) to make the election prescribed in Code Sec. 48D(d).

In addition, the final regulations provide an interim rule for determining a partner's distributive share of the tax exempt income described in Code Sec. 48D(d)(2)(A)(i)(III) and Prop. Reg. Sec. 1.48D-6(d)(2). Under this interim rule, partnerships that meet certain requirements can determine a partner's distributive shares of the tax exempt income resulting from an elective payment election in accordance with the basic principles governing partnership income allocations under the Code Sec. 704(b) regulations, instead of in accordance with the rules under the Code Sec. 706(b) regulations and Reg Sec. 1.46-3(f) for allocations of investment tax credits.

REG-101552-24

Under Code Sec. 761(a), the members of an unincorporated organization that meets certain requirements may elect to exclude the organization from the application of all or part of the partnership rules in Subchapter K of the Code (Code Secs. 701-761). The Code Sec. 761(a) election is available if the income of the members of the organization may be adequately determined without the computation of partnership taxable income and the organization is availed of (1) for investment purposes only and not for the active conduct of a business, (2) for the joint production, extraction, or use of property, but not for the purpose of selling services or property produced or extracted, or (3) by dealers in securities for a short period for the purpose of underwriting, selling, or distributing a particular issue of securities.

The June 2023 proposed regulations provided in Prop. Reg. Sec. 1.6417-2(a)(1)(iv) that partnerships are not applicable entities described in Code Sec. 6417(d)(1)(A) or Prop. Reg. Sec. 1.6417-1(c), regardless of how many of their partners are themselves applicable entities. Accordingly, any partnership making an elective payment election must be an electing taxpayer and, as such, the only applicable credits with respect to which the partnership could make an elective payment election would be the carbon oxide sequestration credit, the credit for production of clean hydrogen, and the advanced manufacturing production credit. However, Prop. Reg. Sec. 1.6417-2(a)(1)(iii) provided that if an applicable entity is a co-owner in an applicable credit property through an organization that has made a Code Sec. 761(a) election, then the applicable entity's undivided ownership share of the applicable credit property is treated as a separate applicable credit property owned by the applicable entity. As a result, the applicable entity may make an elective payment election for the applicable credit(s) determined with respect to such share of the applicable credit property.

Comments were received in response to the June 2023 proposed regulations requesting that the IRS provide additional guidance as to the types of applicable credit property co-ownership arrangements that could validly elect under Code Sec. 761(a) to be excluded from the application of subchapter K. Specifically, practitioners stated that certain facts and circumstances common to jointly owned and operated renewable energy projects appear to violate certain provisions of Reg. Sec. 1.761-2(a). Practitioners requested that the IRS provide that applicable credit property indirectly owned via ownership of an interest in an entity (other than an entity required to be treated as a corporation under the Code) would still be considered owned as co-owners for purposes of Reg. Sec. 1.761-2(a)(3)(i). Practitioners also requested that parties to a joint ownership arrangement of applicable credit property producing electricity be permitted to delegate the authority to enter into multi-year power purchase agreements (PPAs).

In REG-101552-24, the IRS issued proposed regulations that amend the regulations under Code Sec. 761(a). These amendments generally allow any applicable entity that jointly owns applicable credit property that produces electricity to (1) own its interests through an entity (other than an entity required to be treated as a corporation under the Code) and (2) delegate its authority to an agent to sell its share of the electricity produced from such applicable credit property for a period of more than one year, provided that the delegation authority to the agent is not for more than one year.

Notice 2024-27

Generally, Code Sec. 6418 permits eligible taxpayers defined in Code Sec. 6418(f)(2) (transferor taxpayers) to elect to transfer the use of eligible credits defined in Code Sec. 6418(f)(1) (transferred credits) to unrelated taxpayers in exchange for cash. In Notice 2022-50, the IRS requested comments or questions arising under Code Secs. 6417 and 6418. According to the IRS, multiple stakeholders asked that regulations clarify whether "chaining" is permissible. Chaining refers to making an elective payment election under Code Sec. 6417(a) for a credit that was purchased in a transfer for which an election under Code Sec. 6418(a) is made.

Prop. Reg. Sec. 1.6417-2(c)(4) stated that any credit for which an election is made under Code Sec. 6417(a) must have been "determined with respect to" the applicable entity or electing taxpayer, meaning that the applicable entity or electing taxpayer must own the underlying eligible credit property or, in the case of Code Sec. 45X, conduct the activities giving rise to the underlying eligible credit. Thus, this proposed rule, which is consistent with the proposed regulations under Code Sec. 6418, prohibited chaining.

In Notice 2024-27, the IRS requested comments to address specific questions with respect to chaining. According to the IRS, a robust market for transferred credits that helps support a broad array of projects and investment is consistent with Congress's intent in enacting the IRA. The IRS stated that there are early indications that a robust market for transferring credits under Code Sec. 6418 is forming under the current rule; however, the market is relatively nascent, economic conditions are strong, and allowing chaining could further increase demand in and access to that market. The IRS stated that it will continue to evaluate whether potential chaining rules would be consistent with the statutory framework, as well as the legislative purposes, of Code Secs. 6417 and 6418. At the same time, the IRS said that it will be reviewing administrability challenges associated with elective payment elections and transfer elections and will be carefully monitoring for fraud and improper payments, which could undermine the credit transfer market.

For a discussion of elective payment elections under Code Sec. 6417, see Parker Tax ¶104,220.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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