New Rules for Clean Energy Tax Credits

At a Glance

• New proposed rules incorporate stakeholder feedback on elective (direct) pay and transferability.
• The direct pay method provides a means for entities to receive tax credits without having a tax liability.
• Proposed rule allows for greater use of tax credits by specifically small and medium for-profit business that may not have had sufficient tax liability in the past to fully realize the credits.

The IRS and Department of Treasury released the long-anticipated Notice of Proposed Rulemaking (NPRM) for ways to monetize tax credits included in the administration’s Inflation Reduction Act (IRA). The proposed rules, which follow initial guidance released last year, incorporate significant stakeholder and public feedback on the two monetization provisions, specifically elective pay (also known as “direct pay”) and transferability. These proposed rules are another step the administration has taken to implement the IRA, with most energy provisions within the legislation taking the form of tax credits and treasury taking a leading role in implementing energy policy. 

The IRA took a novel approach into the development of these new monetization pathways, given that several of the entities that may seek to invest in qualifying projects including “tax-exempt organizations, State and local governments, Indian tribal governments, Alaska Native Corporations, the Tennessee Valley Authority, and rural electric cooperatives” that do not have a tax liability. The direct pay method provides a means for them to receive these credits without having the tax liability to absorb it. The direct pay method applies specifically to 12 tax credits that were either renewed or restructured, including carbon oxide sequestration (45Q), clean hydrogen (45V), advanced manufacturing (45X) and a host of others outlined in the proposed rule.

The other provision of the IRA’s new tax credit scheme includes the transferability of clean energy tax credits, with 11 being eligible under the proposed rule. The proposed rule allows for greater use of tax credits by specifically small and medium for-profit business that may not have had sufficient tax liability in the past to fully realize the credits. The transferability of these 11 credits allows for these entities to sell their credit to a third party, often through a marketplace, allowing for the entity to fully realize their cash value. The biggest difference, however, from the initial guidance released last year, surrounds the issue of recapture of funds should a project fall out of compliance. The proposed rule clarifies that the buyer of the credit, under the transferability rule, will assume the risk.

Now that the proposed rules have been released, it is expected that the market for these two new provisions will significantly expand, with the provisions opening the market to even more entities. The deadline for comments on the proposed rules is August 14, 2023, and a public hearing on the comments received will be held on August 21, 2023.

The energy, manufacturing and technology team at Faegre Drinker is dedicated to providing client service and government relations representation to the makers of the products essential to modern life.