Elective pay enables eligible entities and organizations — many of which had little federal tax liability before the Inflation Reduction Act — to access incentives by making certain clean-energy credits refundable. Elective-pay-eligible entities include state and local governments, tribal entities, public school districts, rural electric co-ops and such tax-exempts as churches, hospitals, higher education institutions and nonprofits.
Generally, partnerships are ineligible for elective pay. The final regs provide greater clarity for eligible entities to jointly invest in clean energy projects. They also modify partnership tax rules on how co-owned clean-energy projects can elect not to be treated as partnerships for tax purposes.
By collectively electing out of partnership status, co-owners eligible for elective pay can take advantage of it for the share of the project that they own; co-owners ineligible for elective pay could use or take advantage of the transferability rules to transfer their share of the credits from the project.
In response to comments, the regulations do clarify that eligible co-ownership arrangements can be organized to own and operate property giving rise to any of the clean energy tax credits for which elective pay is available. The regs also enable these arrangements to invest in clean energy projects through a non-corporate entity.
The Treasury and the IRS also released for comment proposed regulations that would provide additional administrative requirements for unincorporated organizations that opt out of partnership treatment under the modified rules.
