Sign Up For Novogradac Industry Alert Emails

IRS Proposed Guidance on Transferability, Direct Pay Mechanisms for Clean Energy Credits Opens New Financing Opportunities for a Wider Group of Stakeholders

Published by Peter Lawrence and Stephen Tracy on Thursday, July 6, 2023 - 12:00AM

Stakeholders in clean energy have an entirely new way to monetize clean energy tax credits through transferability and elective pay (also known as direct pay) mechanisms established in the Inflation Reduction Act (IRA) of 2022.

Before the IRA, it was not possible to monetize federal tax credits generated by renewable energy projects outside of tax equity financing structures. Given the limited amount of investors willing to invest via the available tax equity financing structures, the lack of alternative financing structures created a bottleneck on the development and deployment of renewable energy facilities. Generally, until now, only large financial institutions with project finance underwriting capabilities and a small cohort of nonfinancial companies have been repeat tax equity investors. The hope is the transferability and direct pay financing mechanisms will allow new investors to enter the market.

The transferability feature for various green energy tax credits included in the IRA makes it possible for a larger universe of taxpayers to make efficient use of the credits since they will no longer need to participate in more complex tax equity structures. While the tax equity market was more than $25 billion annually before transferability and direct pay were established in the IRA, it is expected that the tax equity market may double or triple because of the new IRA provisions.

The direct pay option allows an eligible entity to make an election that would treat it as having made a tax payment equal to the value of the applicable tax credits that it would otherwise have been eligible to claim (direct-pay election) on its tax return. Under the direct pay option such an entity can now claim a refund from the Internal Revenue Service (IRS) for the excess taxes it paid or is deemed to have paid. Effectively, this option makes the applicable tax credits “refundable” tax credits.

The U.S. Department of the Treasury (Treasury) and IRS published guidance in the June 21Federal Register on both mechanisms (see direct pay proposed rules here and transferability proposed rules here), with comments due Aug. 14th. In announcing the guidance, Treasury said direct pay and transferability will expand the reach of clean energy tax credits and allow a wider diversity of stakeholders to use the credits to finance facilities more quickly and affordably. Treasury also released FAQ documents with fact sheets and other key information.

The guidance includes a list of requirements to qualify for direct pay or transferability, as well as a pre-filing registration requirement. Here's a look at what the proposed guidance covers:

Elective or Direct Pay

Elective or direct pay allows states, local governments, nonprofits, tribal entities and other eligible entities to receive direct payment from the IRS for, or in lieu of, clean energy tax credits, greatly expanding the number of potential beneficiaries of various tax credits and simplifying the financing of clean energy facilities.

The IRA included 12 clean energy tax credits that are eligible for direct pay for nonprofits, governmental agencies and other eligible entities:

  • Internal Revenue Code (IRC) Section 48 energy credit (ITC),
  • Section 45E energy clean energy investment credit (technology neutral ITC),
  • Section 45 production tax credit (PTC),
  • Section 45Y clean energy (technology neutral) PTC,
  • Section 45W commercial clean vehicle credit,
  • Section 45U zero-emission nuclear power PTC,
  • Section 45X advanced manufacturing PTC,
  • Section 45V clean hydrogen PTC,
  • Section 45Z clean fuel PTC,
  • Section 45Q carbon oxide sequestration credit,
  • Section 30C alternative fuel vehicle refueling/recharging property credit (for electric vehicle chargers), and
  • Section 48C qualifying advanced energy project credit.

The June 14 IRS elective payment proposed guidance provides requirements to receive direct pay, including that the entity or taxpayer generally must own the property that generates the credit, although the ownership can come through various structures. The guidance does not allow for mixed partnerships, those with both for-profit and nonprofit partners, to access the direct pay option.

The guidance includes definitions of terms for direct pay, rules for making the election, special rules for electing taxpayers, details on the elective payment election for taxpayers that are partnerships or S corporations, additional information regarding registration and other special rules.

The guidance clarifies that eligible entities using direct pay are not required to reduce the basis of the property by the amount of the investment tax credits or by the amounts of any grants or tax-exempt financing used to construct or acquire the eligible property. However, the aggregate amount of the tax credits and the tax-exempt financing proceeds cannot exceed the overall cost of the eligible property.

Furthermore, if the tax credits were transferred to the eligible entity, those credits are ineligible for the direct pay option.

The guidance further suggests that direct payments will be made by Treasury after the tax return for the applicable year is filed by the eligible entity.


Transferability allows entities that are ineligible for direct pay to sell their credits for cash only on the open market, meaning the entity that owns the renewable energy facility can monetize the credits even if they don’t have a large tax liability to benefit from the credits.

The IRA allows taxpayers to transfer some or all of 11 clean energy credits (all those included in elective pay as referenced above, except the IRC Section 45W commercial clean vehicle credit) to an unrelated third party in exchange for a tax-free cash payment. This feature is available only once; a buyer of the transferred tax credits cannot again sell or further transfer the credits.

The transferability proposed guidance includes additional information for each of the 11 credits that can make use of the transferability mechanism. The guidance also provides definitions of terms, rules for making transfer elections, additional rules for partnerships and S corporations, additional information regarding registration and other special rules.

The transfer election needs to be filed together with the taxpayer’s original tax return. No election can be made on an amended tax return.

Cash proceeds received by a partnership from the sale of its tax credits can be distributed to the partners in any manner agreed to in the partnership agreement, without regard to the way the tax-exempt income or any remaining tax credits are allocated.

A project eligible for the increased credit amount due to various “adders” such as the domestic content requirement, its location in an energy community or low-income community, or eligible for the affordable housing or low-income economic benefit project bonus cannot transfer such additional, or bonus, credit separate from the transfer of the base credit itself. As such, an eligible taxpayer that transfers a portion of its credit amount will transfer the proportionate share of the base credits and the applicable adder (bonus) credit.

The proposed regulations do not provide any exceptions/relief related to the at-risk or passive activity loss rules. As such, individuals and closely held C corporations may need to exercise caution when investing in renewable energy projects or purchasing credits.

The transferee-entity (buyer) generally is liable for any recapture of the credits. Thus, if investment tax credit (ITC)-eligible property ceases to qualify as ITC-eligible property during the recapture period, the credits acquired by the transferee will be subject to recapture. In this regard, the proposed regulations make clear that indemnity provisions intended to contractually shift the recapture risk back to the transferor are permitted and will not affect the effectiveness of the credit transfer. This provision provides an important exception to the general rule that recapture liability is imposed on the transferee.

Pre-Filing Registration Requirements

The proposed guidance includes temporary regulations for an electronic pre-filing registration requirement process that is designed to prevent improper payments to fraudulent applicants and to ensure that taxpayers who qualify for the credit monetization mechanisms can access the benefits.

The IRS wrote they will set up the pre-filing registration later this year, including a requirement for taxpayers to list all applicable credits the entity intends to claim or transfer, as well as other information. The IRS intends to review that information and issue a sperate registration number to each credit property for which the entity or taxpayer provided sufficient information, although the registration number will not confirm credit eligibility. Entities will still be required to establish eligibility for the credit on the applicable tax return before receiving the payment.

The IRS expects to provide more information on the pre-filing registration requirements later this year.

Need for Comments

Direct pay and transferability provide an opportunity to improve the financial outlook and timeline for sponsor/developers of clean energy projects in addition to expanding the number of potential tax credit investors. With the IRS issuing 108 pages of guidance on each option, stakeholders are advised to carefully review the proposed guidance and provide feedback to the IRS ahead of the Aug. 14 deadline.

The Renewable Energy Working Group will continue to review the guidance and provide a forum for stakeholders to further gain more understanding of the provisions and to share thoughts and ideas with their renewable energy industry colleagues. The working group also plans on submitting comments on the guidance. Membership remains open so please consider joining if you are interested in participating in the drafting of the comments.

Learn more about Novogradac's expertise and many services