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Novogradac Renewable Energy Working Group Submits Comments on IRS Proposed Guidance for Elective Pay and Transferability

Published by Alvin Lee on Thursday, August 31, 2023

Journal Cover September 2023   Download PDF

The clean energy community received much-anticipated proposed guidance from the Internal Revenue Service (IRS) in June regarding two new options under the Inflation Reduction Act (IRA) of 2022 that allow tax-exempt and governmental entities to benefit from clean energy tax credits, namely elective pay and transferability.

The Novogradac Renewable Energy Working Group in August submitted comment letters to the IRS on the proposed guidance to request for clarification and to provide recommendations to provide the U.S. Department of Treasury (Treasury) and the IRS with information needed to implement the IRA’s provisions. The goal of the comment letters is to increase accessibility and efficiency in connection with the use of elective pay and transferability.

Elective Pay

The elective pay option is only effective for taxable years beginning after Dec. 31, 2022. Elective pay, also known as “direct pay,” makes certain clean energy tax credits effectively refundable. Eligible entities that qualify for energy investment tax credits, such as local governments, can notify the IRS of their intent to claim the credit (pre-filing registration) and file an annual tax return to claim elective pay for the full value of the credit. The eligible entity would then receive a cash payment for the refundable credit amount.

In a June 14 update to its frequently asked questions page on elective pay, the IRS clarified that applicable entities that can use elective pay include tax-exempt organizations, states and political subdivisions such as local governments, Indian tribal governments, Alaska Native Corporations, the Tennessee Valley Authority, rural electric co-operatives, U.S. territories and their political subdivisions, and agencies and instrumentalities of state, local, tribal and U.S. territorial governments.

Electing taxpayers can make an election to be treated as an applicable entity for certain technologies including carbon sequestration (Internal Revenue Code [IRC] Section 45Q), clean hydrogen (IRC Section 45V) and advanced manufacturing (IRC Section 45X). Direct pay is also available for application-based bonus adders including the low-income communities (IRC Section 48(e)) and advanced energy project credit (IRC Section 48C(e)).


Transferability allows entities that qualify for a tax credit but are ineligible to use elective pay to transfer all or a portion of the tax credit to a third-party buyer for cash. The sale of tax credits is generally nontaxable for the seller and nondeductible for the buyer. Like the direct pay, sellers can notify the IRS of their intent to transfer the credit through a prefiling registration process and make an election on its annual tax return.

Novogradac Renewable Energy Working Group Recommendations

The Novogradac Renewable Energy Working Group provided comments and recommendations regarding direct pay in connection with the application of tax-exempt bond financing, partnerships and S-Corporations, and pre-registration and timing issues.

The Novogradac Renewable Energy Working Group provided comments and recommendations regarding transferability in connection with the preregistration and timing issues, lease pass-through transactions and grouping elections.

Some of the working group’s comments include:


  • Requesting additional guidance in the form of examples that illustrate the application of the at-risk rules.
  • Encouraging reconsideration of the current application of the passive activity rules to transferred credits in Proposed Treasury Regulation 1.6418-2(f)(3)(ii) to be consistent with the conclusions reached in Revenue Ruling 2010-16 and the grouping of activities in Section 1.469-4(c).

Elective Pay

  • Requesting additional guidance on IRC Section 45(b)(3) regarding the use of tax-exempt bond proceeds and examples of how the final regulations will be applied to elective payments.
  • Recommending that the taxpayer should be able to calculate the credit reduction percentage once the bonds are issued, instead of having to recalculate the credit percentage each year (unless new tax-exempt bond proceeds or other funding sources are added, or the total cost of the project changes).
  • Recommending that for purposes of IRC Section 45(b)(3), tax-exempt bond proceeds should be treated as automatically allocated to any portions of the overall facility that are not part of the “qualified facility.”
  • Requesting that Treasury reconsider the proposed rule Treas. Reg. Section 1.6417-2(a)(1)(iv) that partnerships and S corporations are not applicable entities described in IRC Section 6417(d)(1)(A).

To learn about joining, visit the Renewable Energy Working Group.

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