Last week, the Internal Revenue Service (“IRS”) and Department of the Treasury issued the highly anticipated final regulations for the Clean Electricity Production Tax Credit set forth in Section 45Y of the Internal Revenue Code of 1986, as amended (the “Code”) and the Clean Electricity Investment Tax Credit set forth in Section 48E of the Code (the “Final Regulations”), which may be found .  The Final Regulations follow the issuance of proposed regulations (the “Proposed Regulations”) last June.  The Final Regulations provide clarification regarding the definition of “qualified facility” and the mechanism for calculating the greenhouse gas (“GHG”) emissions rates for qualified facilities, although a full analysis of the GHG requirements is beyond the scope of this blog post.  Further, we note that with the incoming administration, the executive branch could review and, potentially, rescind, these Final Regulations, although at this point the Trump administration has not publicly indicated support or a the lack thereof.

The Final Regulations generally apply to facilities placed in service after December 31, 2024, and during a taxable year ending on or after January 15, 2025.  However, certain rules relating to the “One Megawatt Exception” under Section 1.45Y-3 of the Final Regulations and relating to qualified facilities with integrated operations have a delayed applicability date that is 60 days after publication of the Final Regulations.

When Sections 45Y and 48E of the Code were initially enacted, we posted a blog describing the new statutes, which is available here.  The following is a brief, high-level, summary of the Section 45Y and Section 48E rules, but does not describe every requirement for credit qualification.  The rules under Sections 45Y and 48E of the Code apply to qualified facilities that both begin construction and are placed in service, each for federal income tax purposes, on or after January 1, 2025.  As such, qualified facilities that either begin construction or are placed in service before January 1, 2025, should still generally look towards the rules set forth in Section 45 of the Code for the production tax credit (the “PTC”) or in Section 48 of the Code for the investment tax credit (the “ITC”), as applicable. 

The credits under Sections 45Y and 48E are available with respect to any qualified facility that is used for the generation of electricity, which is placed in service on or after January 1, 2025, and has an anticipated GHG emissions rate of not more than zero.  In the case of Section 48E, a qualifying energy storage facility is also eligible for the credit.  Qualified facilities also include any additions of capacity that are placed in service on or after January 1, 2025. 

The credit under Section 45Y generally mirrors the PTC in that it is a credit that is based on electricity produced by a qualified facility, and the credit under Section 48E generally mirrors the ITC in that it is a credit that is based on a taxpayer’s tax basis in a qualified facility, with several differences in each case.  The credit amount for each is generally calculated in the same manner as the ITC or PTC, as applicable.  However, the credit amount is phased out (as set forth in the chart below) based on when construction of a qualifying facility begins after the “applicable year.”  Under Sections 45Y and 48E of the Code, the applicable year means the later of (i) the calendar year in which the annual greenhouse gas emissions from the production of electricity in the United States are reduced by 75% from 2022 levels, or (ii) 2032.

Year After Applicable Year in Which Construction Begins	First	Second	Third	Thereafter
Percent of Credit Remaining	100%	75%	50%	0%

The Final Regulations apply many of the historical rules of Sections 45 and 48 of the Code, including rules surrounding the base credit amount—0.3 cents per kWh of electricity (subject to inflation adjustments) under Section 45Y and 6% under Section 48E.  These credit rates may be increased in either case by satisfying either the 1 MW (AC) exception or the prevailing wage requirements—up to 1.5 cents per kWh of electricity (subject to inflation adjustments) under Section 45Y and 30% under Section 48E.  Energy community and domestic content bonus credits may also increase these credit rates, although there are important differences in how these rules apply.

The below highlights several notable aspects of the Final Regulations.

Notable Rules Under Section 45Y

• Under Section 45Y, a facility that initially operates with greater than zero GHG emissions (and, therefore, is not eligible for the credit under Section 45Y) may later be treated as a qualified facility—and, therefore, eligible for the credit under Section 45Y—if it meets the requirements in any taxable year during the 10-year period beginning on the date the facility was originally placed in service.  For example, if an otherwise qualified facility has greater than zero GHG emissions for its first three years of operation (2025-2027, for example), but then is updated in such a way that it satisfies the zero GHG emissions requirement, then the Section 45Y credit may be claimed for years 4 through 10 of operations (2028-2034, in this example).

• Similar to the PTC, electricity produced at a qualified facility must be sold by the taxpayer to an unrelated person.  However, in a departure from the rules under Section 45, the statute and Final Regulations provide that, in the case of a qualified facility equipped with a metering device that is owned and operated by an unrelated person, the credit under Section 45Y of the Code is available for electricity produced at a qualified facility and sold, consumed, or stored by the taxpayer.  Although this rule provides some flexibility to taxpayers, the IRS declined to adopt the Section 45 rule from IRS Notice 2008-60, which provides that electricity sales will be treated as made to an unrelated taxpayer if the producer of electricity sells electricity to a related person for resale to a person unrelated to the producer.

Notable Rules Under Section 48E

• Under the Final Regulations, “qualified facilities” and “energy storage technology” (“EST”) are defined, and treated, separately.  Accordingly, Section 48E does not permit combined solar and storage facilities—each facility must claim the credit under Section 48E separately as a “qualified facility” or an “EST,” as applicable.  This rule could have implications for application of the prevailing wage and apprenticeship requirements, domestic content adder eligibility, and energy community adder eligibility.

• Similarly, the Final Regulations define “unit of qualified facility” to include all components of functionally interdependent property, and the term “qualified facility” to mean a unit of qualified facility plus integral parts.  This is significant because satisfaction of the prevailing wage and apprenticeship requirements, domestic content adder eligibility, and energy community adder eligibility are each determined on a “qualified facility” basis.  To take an example, this means in many cases that prevailing wage and apprenticeship, domestic content, and energy community eligibility would be measured for a solar facility at the inverter level, rather than on a project-wide basis as is required for the ITC under Section 48 of the Code.  Although this rule was in the Proposed Regulations, many commenters asked the IRS to permit some form of aggregation (similar to the energy project rules under Section 48) for purposes of Section 48E.  The IRS declined this request, and the rules in the Final Regulations now will require very careful planning for prevailing wage and apprenticeship, domestic content adder, and energy community adder purposes.

• In addition, under the Final Regulations, the cost of qualified interconnection property (which is similarly defined under the final regulations for Section 48) is only ITC-eligible for “qualified facilities.”  For EST, the cost of interconnection property is not eligible for the credit under Section 48E.  Again, this is different from the application of the ITC for qualified interconnection property for energy storage technology that is eligible for the ITC under Section 48 of the Code.

Notable Rules for both Section 45Y and 48E

• The Final Regulations adopt the rule from the Proposed Regulations that the following types or categories of facilities may be treated as having an emissions rate of not greater than zero: wind, solar, hydropower, marine and hydrokinetic, geothermal, nuclear fission, fusion energy, and certain waste energy recovery property.  For types or categories of facilities not listed above, taxpayers must rely on the annual table that sets forth the GHG emissions rates in effect as of the date the facility begins construction or, if not set forth on the annual table, the provisional emissions rate determined by the Secretary for the taxpayer’s particular facility.

• In addition, for the types or categories of facilities not listed above, the Final Regulations confirm that certain emissions of GHGs are excluded from the requirement that the GHG rate be not greater than zero, including, for example, emissions that occur before commercial operation commences and emissions from routine operational and maintenance activities.

• Both Section 45Y and 48E rely on the existing prevailing wage and apprenticeship rules contained in Sections 45(b)(7) and (8) of the Code and Sections 1.45-7, 1.45-8 and 1.45-12 and 1.48-13 of the Treasury Regulations except, as noted above with respect to Section 48E, prevailing wage and apprenticeship is measured as the qualified facility level rather than the energy project level (as it has been for the ITC).

• For the 1 MW (AC) exception under both Sections 45Y and 48E, the Final Regulations incorporate similar rules for calculating nameplate capacity as provided in the final regulations under Section 48.  However, the Final Regulations also provide that the nameplate capacity of a qualified facility with “integrated operations” with any other qualified facility must be calculated using the aggregate nameplate capacity of each qualified facility.  A qualified facility will be treated as having “integrated operations” with any other qualified facility if the qualified facilities are of the same type of technology and (1) are owned by the same or related taxpayers, (2) placed in service in the same taxable year, and (3) transmit electricity generated by the qualified facilities through the same point of interconnection, if grid-connected, or are able to support the same end user, if not grid-connected or if delivering electricity directly to an end user behind the meter.  These rules have a delayed applicability date of March 16, 2025.

• Both Sections 45Y and 48E adopt the familiar 80/20 rule, which states that a facility may qualify as originally placed in service even if the unit of qualified facility contains some used components of property provided the fair market value of the used components of the unit of qualified facility is not more than 20% of the total value of the unit of qualified facility (which is determined by adding together the cost of the new components of property plus the value of the used components of property included in the qualified facility). 

The Â鶹´«Ă˝ team will continue to monitor developments in connection with these Final Regulations.  Please reach out to one of the attorneys listed here with any questions.

The Internal Revenue Service (“IRS”) and Department of the Treasury last week released final regulations (the “Final Regulations”) relating to the advanced manufacturing production tax credit under Section 45X (“45X Credits”) of the Internal Revenue Code (the “Code”).  The release of the Final Regulations follows the issuance of proposed regulations in December 2023 (the “Proposed Regulations”), which we described here.  The final regulations are available .

The Final Regulations largely adopt the Proposed Regulations, with a few exceptions.  Importantly, these Final Regulations are applicable to eligible components and applicable critical minerals for which production is completed and sales occur after December 31, 2022, and during taxable years ending on or after October 28, 2024.  Taxpayers may rely on the Final Regulations for eligible components for which production and sales occur after December 31, 2022, and taxable years ending before October 28, 2024, so long as the regulations are followed in their entirety in a consistent manner.

The following provides a brief background of Section 45X of the Code, as well as a summary of the key points from the Final Regulations, highlighting the changes to the calculation of production costs for both electrode active materials and applicable critical minerals.

Background to Section 45X Advanced Manufacturing Credit

Section 45X of the Code, enacted as part of the Inflation Reduction Act in August 2022, provides a manufacturing production tax credit to taxpayers that produce and sell to an unrelated person during the taxable year certain components for renewable energy and battery storage projects, including certain critical minerals.  The tax credit rate varies depending on the eligible component.  45X Credits may be claimed by the taxpayer that produces eligible components. A taxpayer otherwise entitled to claim the 45X Credits may sell 45X Credits to another taxpayer pursuant to Section 6418 of the Code, or claim direct payments in lieu of the tax credits for a five-year period pursuant to Section 6417 of the Code.  45X Credits are set to phase out starting in 2030.

The Final Regulations for 45X Credits

The Final Regulations provide guidance on a number of issues relating to the advanced manufacturing credit.  Among the highlights:

• The Final Regulations expand the definition of “produced by the taxpayer” to include secondary production, which is defined as the production of an eligible component using recycled materials.  Although the preamble to the Proposed Regulations had indicated that secondary production is eligible, the clarification will be welcome news to many taxpayers.
• The term “mere assembly” from the Proposed Regulations is replaced with “minor assembly” regarding whether certain activities or processes result in substantial transformation.
  • This change is primarily concerned with certain eligible components, such as solar modules and battery modules using battery cells, that may be produced primarily by assembling other components but which are clearly eligible for the 45X Credit even though no production beyond assembly is performed by the eligible taxpayer.
  • Like under the Proposed Regulations, where the eligible components have undergone substantial transformation and only minor assembly remains, the party who only performs minor assembly is not entitled to 45X Credits.
• §1.45X-1(c)(3)(v)(D), Example 4 is added to demonstrate how contract manufacturing provisions may apply to taxpayers who perform extracting and refining activities.
• The Final Regulations maintain that the domestic production requirement does not apply to constituent elements, materials and subcomponents used in the production of eligible components.
• The Final Regulations clarify the requirements for the signed certification statement, which was left open-ended in the Proposed Regulations, to be made in connection with a contract manufacturing arrangement between parties.  Going forward, such signed certification statement must be made in the manner required in Form 7202 (Advanced Manufacturing Production Credit).

• The Final Regulations revised portions of the rules related to specific eligible components. Modifications were made for:
  • Solar energy components, including photovoltaic cells, polymeric backsheet, and solar grade polysilicon
  • Related offshore wind vessels
  • The total rated capacity of completed wind turbines
  • Inverters
  • Qualified battery components
  • Battery cells
  • Modules using battery cells
  • Applicable critical materials
    • With respect to the definition of aluminum, the Treasury Department and IRS have determined that additional consideration is necessary prior to finalizing Section1.45X-4(b)(1) of the Proposed Regulations.
• The Final Regulations contain several changes to the calculation of production costs for purposes of calculating 45X Credit related to electrode active materials and applicable critical minerals.
  • For both electrode active materials and applicable critical minerals, the Final Regulations allow taxpayers to include extraction costs related to the extraction of raw minerals in the United States or a United States territory in the calculation of production costs, but only if such costs are paid or incurred by the taxpayer claiming the 45X Credits.
  • Additionally, the Final Regulations clarify that taxpayers may also include direct and indirect materials costs in production costs if those material costs do not relate to the purchase of materials that are, at the time of purchase, an eligible component.
• While left ambiguous in the Proposed Regulations, the Final Regulations clarify that a taxpayer may not include the same production costs in the calculation of the credit amount for more than one eligible component.
• The substantiation rules for applicable critical minerals were extended and were duplicated for electrode active materials. To include materials costs as production costs, the taxpayer must submit, along with its tax return for each year in which 45X Credits are claimed, a certification from each relevant supplier stating that the supplier is not claiming the 45X Credit and is not aware of any prior supplier claiming the 45X Credit. The taxpayer must also maintain in its books and records: an analysis concluding that any constituent elements, materials, or subcomponents did not meet the definition of an eligible component at the time of acquisition; a list of direct and indirect material costs; a document establishing that the materials were used in the production of the electrode active material or the applicable critical mineral; and any other information related to the direct or indirect materials specified in guidance.

The Â鶹´«Ă˝ team will continue to monitor developments related to 45X Credits.  Please reach out to one of our team members if you have any questions.

This announcement comes after a long planning and approval process that began back in November 2021, when the Bipartisan Infrastructure Law was signed, designating $7.5 billion to buildout a national network of electric vehicle charging stations. The National Electric Vehicle Infrastructure (NEVI) Program lays the groundwork for formula funding designation and use for electric vehicle charging infrastructure throughout the country. You can learn more about the NEVI Program in our December 29, 2021, and January 19, 2021, posts.

As required by the NEVI Program, Wisconsin created its NEVI implementation plan (called the WEVI Plan) in 2022, which was updated for 2023and submitted to the Federal Highway Administration (FHWA) for approval. The FHWA approved the plan on September 29, 2023, making Wisconsin eligible to receive approximately $78 million in NEVI federal funds over five years, beginning in federal fiscal year 2023.

Following NEVI Program guidance, which outlines standards and requirements for projects under the program,WisDOT selected 53 sites to receive NEVI funds to build charging stations. These sites are dispersed across the state throughout the identified Alternative Fuel Corridor (AFC) system, which runs through the state of Wisconsin. The AFC includes interstate highways as well as other major highways that traverse the state. Furthermore, NEVI requires stations to be installed every 50 miles along each state’s identified AFC.   

The new charging stations will help increase both the efficiency and speed of electric vehicle (EV) infrastructure around the state. The NEVI Program mandates a minimum of 150 kWh minimum per port, with each station hosting at least four ports. These advanced charging stations will all be classified “level three” and can deliver a full charge to certain vehicles in less than 30 minutes, according to Ben Behlke of RENEW Wisconsin. Many of the selected WEVI locations will feature additional amenities such as pull-through parking and canopies and will include a variety of charging station models and manufacturers ranging from Aliptronic America to Tesla. The increasedfrequency of charging stations along major highways, combinedwith the enhanced charging speed, should bolster consumer confidence for people contemplating purchasing an EV as their next car.

Over 260 applications were submitted in this first round of funding, according to WisDOT, with only 53 sites selected. The selected sites span a variety of businesses, including gas stations convenience stores, hotels, and other easily accessible businesses. Although these first-round awardees will receive a total of over $23.3 million in federal funds, the NEVI Program requires that recipients match the grant money with private investments equal to 20% or more of the total cost of a project. These outside private investments will total approximately $10.5 million, according to the WisDOT.

Many of the awarded businesses could implement layered financing structures to develop the charging stations, using NEVI federal funding alongside private investment (which, as noted, must equal at least 20% of the total project costs), and Section 30C tax credits. This layered financing approach would maximize the investment and production of new charging stations across the state. You can read more about Section 30C tax credits for the installation of EV charging stations in our August 25, 2022 post. This attractive financial structure should undoubtedly incentivize more applications to be submitted for the remaining two rounds of funding which are poised to allocate the nearly $55 million of federal funding remaining.

Looking ahead, the success of this initial round of awardees sets a promising precedent for the next two rounds of funding. As Wisconsin continues to implement its WEVI Plan, the state’s transportation sector in the state is well positioned for a greener, more interconnected future, accompanied by expanding opportunities for investing in renewable energy. Similar approaches to NEVI implementation are being deployed across the country, opening up substantial infrastructure and economic opportunities in the energy transition landscape.

Late last week, the Internal Revenue Service (“IRS”) and Department of the Treasury released  relating to transfers of certain tax credits pursuant to Section 6418 of the Code (the “Code” and, such rules, the “Final Tax Credit Sale Rules”).  The release of the Final Tax Credit Sale Rules follows the issuance of proposed regulations in June 2023, a comment period, and a public hearing (the “Proposed Tax Credit Sale Rules”).  The Final Tax Credit Sale Rules largely adopt the Proposed Tax Credit Sale Rules, with a few minor exceptions. 

The following provides a brief background of Section 6418 of the Code, as well as a summary of the key points from the Final Tax Credit Sale Rules, highlighting the changes from the Proposed Tax Credit Sale Rules. 

Background to Section 6418 Tax Credit Sales

The Inflation Reduction Act, passed in August 2022, permits taxpayers to sell all (or a portion of) ITCs (including under Section 48E), PTCs (including under Section 45Y), Section 45X advanced manufacturing production tax credits, Section 45V hydrogen production tax credits, and several other tax credits, to an unrelated taxpayer.  The election to transfer must be made no later than the due date for the tax return of the year in which the credit is determined.  Once made, the election is irrevocable.

To purchase credits, the buyer must pay for the credit in cash, the buyer is not permitted to deduct the amount paid for such credit, and the buyer may not subsequently transfer the credit.  The payment will not be included in the gross income of the seller.  Penalties apply for excessive credit transfers.

Final Tax Credit Sale Rules

The Final Tax Credit Sale Rules largely adopt the Proposed Tax Credit Sale Rules, with virtually zero changes to the underlying substance.  In response to the Proposed Tax Credit Sale Rules, the IRS received more than 80 written comments and heard testimony from 10 presenters at an August 2023 hearing.  The IRS declined to incorporate various changes many were advocating for in the Final Tax Credit Sale Rules.  Among the highlights:

• The prohibition on transferring bonus credit amounts separately from underlying credit amounts remains intact, with the IRS explaining that bonus credit amounts are not, in themselves, an eligible credit but only an amount taken into account to determine the single eligible credit with respect to an eligible credit property.

• The IRS declined to revise the Final Tax Credit Sale Rules to allow for transfers of tax credits following a lease passthrough election, meaning a lessee in an inverted lease transaction would not be allowed to transfer any tax credits under Section 6418 of the Code.
• The IRS declined to allow advanced payments for transfers of eligible credits, citing complex legal and administrative issues.  Many commenters requested that the Final Tax Credit Transfer Rules would allow advance payments for PTCs, in particular, to better align the timing of payments for PTCs with the timing of payments for ITCs.  However, the IRS did note that there is no prohibition on either a tax credit purchaser or another third-party loaning funds to a tax credit seller, so long as such loans are at arm’s length and properly treated as loans (and not an upfront payment) for federal income tax purposes.

• Several commenters asked the IRS to change the proposed rule that Section 469 and passive credit limitations apply to tax credit purchasers.  Such a change had the potential to permit more individuals to purchase credits and offset their tax liability from wages with such purchased credits.  The IRS declined to make this change and, therefore, credit buyers must carefully consider application of Section 469’s passive credit rules prior to making purchases.

While the Final Tax Credit Sale Rules largely adopt the Proposed Tax Credit Sale Rules, the Final Tax Credit Sale Rules do provide clarification on a number of provisions contained in the Proposed Tax Credit Sale Rules.  Among the highlights:

• The Final Tax Credit Sale Rules contain much needed explanation regarding the treatment of tax credit transfers on superseding and amended returns, clarifying that a transfer election may be made or revised on a superseding return, but not on an amended return.  However, an amended return can correct any numerical errors with respect to the transfer election, but only if there is a substantive item to correct (i.e., a blank item cannot be corrected on an amended return).  Note, the Final Tax Credit Sale Rules do not require a buyer or seller of eligible credits to notify the other in the instance an adjustment of the eligible credit is made on an amended return.  As such, we recommend parties contract for this requirement going forward.

• For purposes of determining when an eligible credit is taking into account, the Final Tax Credit Sale Rules clarify that a 52-53-week taxable year of a buyer or seller of eligible credits would be deemed to end on or close on the last day of the calendar month nearest to the last day of the 52-53-week taxable year for purposes of Section 6418 of the Code. 

• The Final Tax Credit Sale Rules clarify certain rules relating to recapture.  They clarify that, to the extent a partner in a partnership that sells eligible credits is subject to recapture that does not result in recapture liability to a buyer of such eligible credits, the partner-level recapture amount reduces the remaining amount of ITCs subject to recapture for any subsequent recapture event at the partnership/project level.  In addition, in the instance a seller does not transfer all eligible credits from an eligible credit property and the eligible credits from such eligible credit property are later subject to recapture, the Final Tax Credit Sale Rules confirm that responsibility for recapture is generally shared between the seller and the buyer proportionately.

Â鶹´«Ă˝ will continue to monitor developments in connection with these rules.  Please reach out to one of the attorneys listed here with any questions.

The Internal Revenue Service (“IRS”) and Department of the Treasury earlier this week released relating to direct cash payments for certain tax credits pursuant to Section 6417 of the Internal Revenue Code (the “Code” and, such rules, the “Final Direct Payment Rules”).  The release of the Final Direct Payment Rules follows the issuance of proposed regulations in June 2023 (the “Proposed Direct Payment Rules”).  The Final Direct Payment Rules largely adopt the Proposed Direct Payment Rules, with a few exceptions. 

The following provides a brief background of Section 6417 of the Code, as well as a summary of the key points from the Final Direct Payment Rules, highlighting the changes from the Proposed Direct Payment Rules. 

In addition to the Final Direct Payment Rules, the IRS has issued that would allow unincorporated organizations to be excluded from the application of partnership tax rules if such organizations include tax-exempt members (such as state and local governments and Indian Tribal governments) and are organized exclusively to produce electricity from certain property (the “761 Regulations”).  These 761 Regulations would provide an opportunity for taxpayers eligible for direct cash payments to participate in certain joint ventures with taxpayers no eligible for direct cash payments.  Taxpayers may rely on the proposed regulations until final regulations are promulgated, and parties interested in commenting before final regulations are issued may submit written comments to the IRS by May 10, 2024.

Background to Section 6417 Direct Pay Elections

Section 6417 of the Code, enacted as part of the Inflation Reduction Act (the “Act”) in August 2022, permits certain entities to claim a direct cash payment in lieu of certain tax credits.  This opened the door to far more investment in renewable energy and energy transition projects from entities that would not otherwise have the opportunity to utilize credits associated with those projects (because of a lack of actual tax liability to utilize such credits).  Certain specified entities, including tax-exempt entities, states and political subdivisions, the Tennessee Valley Authority, Alaska Native Corporations, and Indian tribal governments, may claim a direct cash payment for the production tax credit under Section 45 of the Code (“PTC”), credits under Section 45Y relating to technology neutral production tax credits beginning in 2025, the investment tax credit under Section 48 of the Code (“ITC”), credits under Section 48E relating to technology neutral investment tax credits beginning in 2025, and several other credits.  In addition to the entities described above, taxable entities may elect to receive cash payments in lieu of tax credits with respect to Section 45Q carbon capture and sequestration credits, Section 45V hydrogen production tax credits, and Section 45X advanced manufacturing production tax credits, subject to certain limitations.  The direct pay election must be made no later than the due date for the tax return of the year in which the election is made.

Final Direct Payment Rules

The Final Direct Payment Rules provide guidance on a number of issues relating to the direct payment for eligible tax credits.  Among the highlights:

• The Final Direct Payment Rules provide detail regarding various defined terms used in Section 6417, including “applicable entity.”

• “Applicable entities” (i.e., those entities eligible to claim direct pay for all of the applicable credits under Section 6417) include:

• Non-profit organizations with federal tax-exempt status.
  • The Final Direct Payment Rules clarify that it is insufficient for an entity to be classified as a non-profit solely under state law.
• Any State, the District of Columbia, or political subdivision thereof.
• An Indian tribal government or subdivision thereof.
• Any Alaska Native Corporation.
• The Tennessee Valley Authority.
• Any corporation operating on a cooperative basis that is engaged in furnishing electric energy to persons in rural areas.
  • The Final Direct Payment Rules clarify that an entity that installs energy equipment does not “furnish electricity” for purposes of qualifying as an eligible entity under Section 6417.
• Instrumentalities and agencies of states (collectively, “Applicable Entities”)
• Taxable entities may elect to be treated as Applicable Entities with respect to Section 45Q carbon capture and sequestration credits, Section 45V hydrogen production tax credits, and Section 45X advanced manufacturing production tax credits.

• The Final Direct Payment Rulesprovide guidance regarding electing taxpayers, how to make the direct pay election, the determination of the applicable credit amount, and the impact on credit amounts for grants and other funding awards that are not taxable. 

• Partnerships and S corporations are not considered Applicable Entities permitted to claim cash payments for ITCs, PTCs, or other eligible credits, even if all partners or shareholders, as applicable, are otherwise Applicable Entities.  See the discussion below relating to the 761 Regulations and the option to elect out of partnership treatment in certain situations.

• If an election is made pursuant to Treasury Regulations Section 1.48-4 to pass through ITCs to a lessee of property, the lessee may not elect to receive a cash payment with respect to such ITCs. In addition, no direct payment election may be made under for credits purchased pursuant to Section 6418.  These outcomes were predictable, but will be disappointing for many who lobbied for cash payments in inverted lease and tax credit sale transactions.

• A direct pay election must be made on the entity’s original annual tax return.

• The Final Direct Payment Rules clarify that while an Applicable Entity cannot initially make or revoke a direct pay election on an amended return, certain errors relating to such election may be corrected on an amended return. 

• The Final Direct Payment Rules also allow Applicable Entities that would not otherwise file an annual tax return to choose to file its return based upon a calendar or fiscal year, provided any such entity maintains adequate books and records to support such choice.

• If an Applicable Entity uses any grants, forgivable loans, or other amounts that are exempt from income tax to acquire or construct investment-related credit property (generally, ITC-eligible property and certain other types of property for which the credit amount is based on purchase price or cost to construct), such amounts generally do not reduce basis for purposes of computing the available cash payment amount. However, if (1) such amounts are for the specific purpose of purchasing, constructing, reconstructing, erecting, or otherwise acquiring an investment-related credit property (the “Specific Purpose Test”), and (2) such amounts plus the applicable credit otherwise determined with respect to the investment credit property exceeds the cost of the property, then the amount of the cash payment is subject to reduction. 

• The Final Direct Payment Rules clarify when the Specific Purpose Test must be conducted, and how the rule is applied.  For example, for tax-exempt grants, the Specific Purpose Test is conducted at the time the grant is awarded.  If the grant is awarded after the property is purchased, constructed, reconstructed, erected or otherwise acquired, the amount of the cash payment is not subject to potential reduction unless the approval of the grant was perfunctory and the amount was virtually assured at the time of application.  For loans, the Specific Purpose Test is conducted at the time the loan is approved.

Additional Guidance Regarding Co-Ownership — 761 Regulations

As noted above, the Final Direct Payment Rules do not permit an entity taxed as a partnership to make a direct pay election, even if all of the partners are entities that would individually be eligible for direct pay.  However, the IRS issued the 761 Regulations to allow certain unincorporated organizations that are organized exclusively to produce electricity from certain property to elect to be excluded from the application of the partnership tax rules, potentially enabling more Applicable Entities to obtain cash payments.    

To be excluded from the partnership tax rules under the 761 Regulations, an unincorporated organization must meet the following requirements:

• The members of the organization must be able to be adequately compute their income without the necessity of computing partnership taxable income;

• The organization is availed of for the joint production, extraction, or use of property, but not for the purpose of selling services or property produced or extracted; and

• The following four requirements must be satisfied:
  • The entity must be owned, in part or in full, by one or more Applicable Entities,
  • The members must enter into a joint operating agreement with respect to the applicable credit property in which the members reserve the right separately to take in kind or dispose of their pro rata shares of the electricity produced or any associated tax credits,
  • The entity must, pursuant to a joint operating agreement, be organized exclusively to jointly produce electricity from its applicable credit property, and
  • The Applicable Entity that is a member of such unincorporated organization must make a direct pay election under Section 6417(a).

The election out of application of partnership rules applies only to certain types of direct payment tax credits — PTCs, nuclear power production credits under Section 45U of the Code, technology neutral PTCs under Section 45Y, ITCs, and technology neutral ITCs under Section 48E of the Code.

Although the rules are nuanced in their application and careful structuring is needed to ensure compliance, the 761 Regulations provide a potential path for Applicable Entities to co-own, through unincorporated organizations (such as limited liability companies), certain eligible credit property and claim direct payments, effectively avoiding application of the direct pay limitations for partnerships.

Â鶹´«Ă˝ will continue to monitor developments in connection with these rules.  Please reach out to one of the attorneys listed here with any questions.