Provisions in the Inflation Reduction Act are changing the landscape for issuers this tax season as they invest in clean energy while navigating the learning curve for turning credits into cash.
"I went to Washington state and was talking to a room of three hundred people," said Emily Brock, director of the federal liaison center, Government Finance Officers Association. "I said, 'how many folks are going to claim this credit?' Four or five hands were raised.
"Then I said, 'how many of your entities bought electric vehicles in the last year?' and ninety percent of the room raised their hands."
GFOA members and other issuers are being encouraged to take advantage of a rule change that reimburses them for 30% to 70% of their investment in electric vehicles, renewable energy production, alternative fuel refueling infrastructure and other clean energy-related efforts. The rebates come in the form of paper checks or direct deposits.
The chain of legislation, rulings, and clarifications that transformed direct pay, also known as elective pay, began in January 2023 via provisions in the IRA designed to accelerate investment into green energy use and production. In the past, green energy tax credits could only be earned by tax-paying entities.
"The elective pay provisions of the IRA allow public power utilities, rural electric cooperatives, the Tennessee Valley Authority, and other qualifying tax-exempt entities to directly benefit from certain energy-related credits," said John Godfrey, senior government relations director, American Public Power Association.
The APPA has been instrumental in nailing down the fine print in complex regulations that initially slowed things down but are now bearing fruit.
Publicly-owned power companies and rural electric co-ops combined produce about 30% of the nation's electricity and routinely rely on bond financing for infrastructure projects. The energy companies moved cautiously forward with the new rules while working with the Internal Revenue Service on additional guidance.
Clarifications were provided in
"We now all of a sudden have the mechanism by which we can capture these elective payments and we also have to become income tax statement filers, because we've never filed income tax before," said Brock.
Governmental entities, power companies and bond lawyers are now actively wading through the regulations and paperwork needed to unlock the funds.
"The IRS has provided a significant amount of guidance on these credits and has been responsive to stakeholder input," said Eorl Carlson, a shareholder in the Tax Department of Jones Hall, APLC
"The amount of guidance necessary to implement the Inflation Reduction Act credits is monumental," Carlson continued. "The guidance requires incorporating engineering details for the covered technologies and who and what are eligible to receive credits."
According to Carlson, the program is wildly popular with water utilities, water districts, wastewater districts and even small school districts.
"The IRA represents a once-in-a-generation investment in America's clean energy future," said Rep. Jennifer McClellan D-Va.
"This means that school districts won't have to rely on oversubscribed and competitive loan and grant programs to make long-term investments in healthy, sustainable, and efficient schools within our communities,"
McClellan is a member of the Sustainable Energy and Environment Coalition and advocates for public school financing programs. She notes that, "In Virginia, many of our school facilities are outdated and in need of upgrades. In fact, over 50% of our school are over 100 years old."
Tribal governments are also eligible for the credits, but long-simmering regulatory roadblocks remain in place.
One of the major sticking points is determining the tax status of entities chartered by Tribes. According to the IRS, the definition of "entities" can include Tribal governments, section 17 corporations, Tribally-chartered corporations, state law corporations, and limited liability corporations.
"For over thirty years, Tribes have sought confirmation from the IRS and Treasury regarding the tax status of entities chartered under Tribal law," said the NAFOA, which was founded as the Native American Finance Officers Association.
"This ongoing uncertainty has posed persistent challenges, creating unnecessary barriers to economic development and limiting Tribes' capacity to generate revenue for programs and services."
In October, Tribal governments met with the Treasury's Tribal Advisory Committee to untangle the red tape that's keeping direct pay from freely flowing into Indian Country. The roots of the problem tie back to long-standing treaty disputes.
Per the NAFOA, "Tribal businesses require a solid legal foundation to effectively access these credits and expand into clean energy development. Until these critical questions are resolved, tribal governments and businesses will continue to face competitive disadvantages and will gain limited benefits even with legislative and regulatory changes."
Despite the legal hurdles, the Tribes are seeing progress with the negotiations. Per their statement, "NAFOA is optimistic about upcoming consultations aimed at further addressing key issues, including the tax status of partially owned Tribal corporations."
Building solar arrays and erecting wind turbines requires access to large tracts of land, negotiations over right-of-way, and transmission line infrastructure to move the power onto the grid.
IRA funding comes with strings tied to "domestic content," which refers to a clause in the provisions requiring that all "manufacturing processes for steel and iron components must take place in the United States."
Components of the project are also affected, a complication that penalizes photovoltaic panels and wind turbines that could be sourced from overseas suppliers.
According to the APPA, "While every project gets a bonus tax credit if they meet domestic content requirements, applicable entities, including public power utilities lose access to elective payment if they do not meet domestic content requirements."
There are exceptions to the rules and APPA is continuing to press on the Treasury Department for additional fine tuning of the regulations.
Per APPA, "This lack of guidance relating to domestic content requirement for elective payment, the exceptions to that requirement, and the uncertainty it is causing has largely sidelined all but the smallest of projects or projects which could begin construction before the phase-out discussed above really kicks in."
The legislation that created the expanded direct pay to non-profits was passed under political duress.
"Every single congressional Republican voted against the IRA," said McClellan. "Despite that, I hope they recognize the incredible impact these provisions have on our communities. We're seeing these investments flow to red and blue districts alike."
Bipartisanship is very much alive when it comes to claiming the benefits.
"The program appeals to tax-exempt entities across regions and perspectives," said Carlson. "Tax-exempt entities have undertaken these projects for reasons unrelated to a particular viewpoint. Some tax-exempt entities may undertake these projects for reasons related to climate and sustainability. Others may undertake projects for resiliency."
Changes to the balance of power resulting from the election and the current back-up in the appropriation process could have an affect on the future of the direct pay program.
"It is an appropriation bill," said Brock. "In every budget they're going to have to assign the cash to the IRS to issue the credit and there's going to have to be a determination of use and expectation. The IRA has been approved for the next two years through the process of congressional budgeting, but then it's going be discussed again."
GFOA members see adopting electric vehicles as the low-hanging fruit of direct pay. "The easiest filing you can do is when you purchase a vehicle," said Brock. "You know how much it costs, you have the point of sale, you have the vehicle title. You have all those things that the IRS wants."
Issuers in the organization are also exploring biogas projects and solar farms. "We're very excited about the potential here," said Brock. "We don't have any intention of leaving this money on the table."
