Overview of Elective Payment and Credit Transfer Provisions
The elective payment and credit transfer provisions are part of a new framework designed to make certain tax credits more accessible and financially beneficial for tax-exempt entities, such as municipalities, nonprofits, and tribal governments. Here’s how these provisions work:
Elective Payment (Direct-Pay Election)
- Eligibility: Applicable entities, including tax-exempt organizations, states, local governments, Indian tribal governments, and certain other governmental entities, can use elective pay.
- Functionality: Elective pay allows these entities to treat certain tax credits as effectively refundable. They can make an election to receive a direct payment from the IRS equal to the credit amount, even though they do not have tax liability.
- Election Process: To receive an elective payment, entities must make an elective payment election on their annual tax return.
- Applicable Credits: Elective pay is available for several clean energy tax credits, including the Production Tax Credit (PTC), Investment Tax Credit (ITC), and credits for carbon sequestration, advanced manufacturing, clean hydrogen, and more.
Credit Transfer (Transferability)
- General Concept: Credit transferability allows taxpayers, including those not eligible for elective pay, to transfer certain tax credits to other entities. This can help monetize credits that would otherwise be unusable due to a lack of tax liability.
- Eligible Credits: Transferability is authorized under IRC Section 6418 and is applicable to certain tax credits where elective pay is also available.
- Benefits: This provision provides additional financing opportunities for projects by allowing credits to be sold to entities with sufficient tax liability to use them.
Special Considerations
- Partnerships and S Corporations: Special rules apply if the taxpayer is a partnership or S Corporation, as they may make elections to be treated as applicable entities for certain credits.
- Strategic Use: Both elective pay and credit transferability can be strategic tools for entities to pursue clean energy investments by making tax credits more financially viable.
These provisions aim to incentivize the development of clean energy projects by expanding the accessibility and utility of tax credits for a wider range of entities.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/how-do-the-elective-payment-and-credit-transfer-provisions-work/
