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Local governments, nonprofits, and other entities can now invest more easily in clean energy projects under new rules.
The U.S. Department of the Treasury and the IRS recently finalized new regulations that expand access to the clean energy tax credits under the Inflation Reduction Act (IRA). Direct-pay-eligible entities now include local governments, public school districts, hospitals, tribes, and nonprofits, which should make it easier to co-invest in clean energy projects without worrying about the liabilities of traditional tax liability.
The new rules continue to implement a provision of the IRA, allowing entities with little or no federal tax liability to access clean energy tax credits by direct pay. The prior guidance had precluded partnerships from qualifying for direct pay; the new regulations make clear how co-owned projects avoid being treated as partnerships for tax purposes. With flexibility, eligible co-owners would be able to use the direct-pay option with their share in the project; the others not qualified to exercise the direct pay could benefit instead through other options available, such as credit transferability.
Local governments and school districts are not the only eligible entities. There are also tribes, territories, Alaska Native Corporations, and tax-exempt organizations such as churches and hospitals. This way, multiple eligible entities can come together and invest in clean energy projects under the same umbrella of rules.
The Treasury's final rule also discusses the structuring of co-ownership arrangements to invest in clean energy projects through noncorporate entities. Updates were made to allow access to tax credits for projects qualifying under the IRA's clean energy goals. Moreover, the IRS has proposed new regulations on unincorporated organizations that wish to opt out of partnership treatment under the new rules.
These changes are part of the Biden administration’s broader push to accelerate the transition to clean energy and reduce greenhouse gas emissions, making it easier for communities and organizations to participate in and benefit from clean energy investments.
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