The US Department of the Treasury and the IRS, in a press release on 19 November 2024, issued final regulations that will expand the reach of the Biden-Harris Administration’s Inflation Reduction Act by helping entities that co-own clean energy projects access clean energy tax credits through elective pay – commonly known as direct pay.

The final rules will improve access to direct pay for co-owned clean energy projects, helping to expand the buildout of the clean energy economy.

Prior to the Inflation Reduction Act, many entities – like state and local governments, Tribes and territories, public school districts, rural electric co-ops, and tax-exempt organisations like churches, hospitals, higher education institutions, and non-profits – could not benefit from clean energy tax credits because they had little or no federal tax liability. Direct pay enables these entities and organisations to access the full value of clean energy incentives and helps projects get built more quickly and affordably to reduce costs and benefit businesses and communities.

The guidance provides greater clarity and flexibility for direct pay eligible entities that want to jointly invest in clean energy projects – for example, a tax-exempt entity co-investing in a clean energy project with a for-profit developer, or multiple tax-exempt entities or governments that are seeking to jointly invest in clean energy projects.

“The Biden-Harris Administration is focused on continuing the clean energy investment boom and ensuring all Americans benefit from the growth of this sector. Direct pay is helping more clean energy projects be built quickly and affordably, and American communities are benefitting as a result. Today’s rules will increase the availability of capital for clean energy projects by providing certainty and flexibility for state and local governments, Tribes and territories, non-profits, and more to benefit from these resources,” said US Deputy Secretary of the Treasury Wally Adeyemo. 

Specifically, Treasury’s final regulations make targeted modifications to existing partnership tax rules clarifying how co-owned projects in the clean energy space can elect not to be treated as partnerships for tax purposes, and providing such projects additional flexibility. These changes are important because under the Inflation Reduction Act, partnerships are not among the entities that are generally eligible for direct pay.

By collectively electing out of partnership status, co-owners that are eligible for direct pay can take advantage of direct pay for the share of the project that they own while co-owners that are not eligible for elective pay could use transferability.

In response to comments received, the final regulations clarify that eligible co-ownership arrangements can be organised to own and operate property giving rise to any of the Inflation Reduction Act credits where elective pay is available. It also enables such arrangements to invest in clean energy projects through a noncorporate entity.