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June 20, 2023

IRS issues proposed rules on direct-pay elections of applicable energy tax credits

  • The IRS and Treasury Department have released proposed rules that answer many questions surrounding direct-pay election provisions under new IRC Section 6417.
  • The proposed rules address issues such as the inclusion of state agencies and instrumentalities as applicable entities, calculation of the direct-pay eligible amount, the process for making elections, and the timing for elections and refunds.
  • The proposed rules confirm that partnerships are not considered applicable entities and therefore cannot make direct-pay elections, with some exceptions.
  • Temporary rules issued at the same time lay out a pre-filing process requiring entities that want to make direct-pay elections to register with the IRS to obtain a registration number to use in the election.

The IRS has released proposed rules (REG-101607-23) on the direct-pay election of applicable energy credits under IRC Section 6417.

The Inflation Reduction Act added IRC Section 6417, which allows eligible tax-exempt taxpayers to make a direct-pay election for certain energy credits so they can get payments from the government instead of tax credits. The proposed rules give details on implementing this direct-pay election.

At the same time, the IRS released proposed rules (REG-101610-23) on transferring renewable energy credits (see Tax Alert 2023-1103), FAQs on the two options and temporary rules (TD 9975) on the pre-filing requirements. Taxpayers choosing to receive elective payments of the credits under IRC Section 6417 cannot transfer the credits under IRC Section 6418.

The IRS received over 200 comment letters on the IRC Sections 6417 and 6418 provisions in response to a request for comments. Written or electronic comments on the proposed rules must be received by August 14, 2023.

The proposed rules would apply to tax years on or after the date the final rules are published in the Federal Register. Taxpayers may rely on the proposed rules for tax years beginning after December 31, 2022, if they follow the proposed rules in their entirety and in a consistent manner.


The IRA provides a direct-pay option for certain credits. Under new IRC Section 6417, an "applicable entity" can make a direct-pay election (effectively treating tax credits generated by a renewable energy project as equivalent to taxes paid on a filed return), but only for certain tax credits, including:

  • Certain portions of the IRC Section 30C alternative fuel vehicle refueling property credit
  • IRC Section 45 production tax credit (PTC) (for facilities placed in service after December 31, 2022)
  • IRC Section 45Q credit (for capture equipment originally placed in service after December 31, 2022)
  • The new IRC Section 45U zero-emission nuclear power production credit
  • The new IRC Section 45V hydrogen PTC (for facilities placed in service after December 31, 2012)
  • The IRC Section 45W credit for commercial vehicles (for tax-exempt entities)
  • The new IRC Section 45X advanced manufacturing credit
  • The technology-neutral PTC (new IRC Section 45Y) and investment tax credit (ITC) (new IRC Section 48E)
  • The new IRC Section 45Z clean fuel production credit
  • IRC Section 48C qualifying advanced energy credit
  • IRC Section 48 ITC

As noted, the direct-pay option can only be used by "applicable entities," which generally only include entities exempt from federal tax under subtitle A, state or local governments, the Tennessee Valley Authority, Indian tribal governments or an Alaska Native Corporation. However, certain important exceptions to the "applicable entity" limitation exist, so any eligible taxpayer can elect direct pay for:

  • The first five years of the new IRC Section 45V credit for the production of clean hydrogen
  • The first five years of the IRC Section 45Q credit (starting with any tax year in which the taxpayer has, after December 31, 2022, placed in service carbon capture equipment at a qualified facility)
  • A five-year period of the new IRC Section 45X advanced manufacturing credit

For the IRC Section 45Q credit, the direct-pay election applies separately to carbon capture equipment originally placed in service by the applicable entity during a tax year. Additionally, any taxpayer making a direct-pay election may revoke that election, which will apply to each subsequent year remaining within the five-year period.

From a procedural perspective, a direct pay election generally (1) applies separately to each applicable facility or property, (2) must be made in the first year the facility (or applicable equipment) is placed in service and, (3) applies for the full applicable credit term period, subject to the time-limited direct pay options for certain taxpayers described previously. Certain credits tie the ability to elect direct pay to the satisfaction of the domestic content requirements. Additionally, partnerships or S corporations that directly hold a facility or property eligible for the credit must make the direct-pay election, and it is the partnership or S corporation that receives the direct payment (as opposed to the partners or owners). Finally, an additional 20% penalty can apply to taxpayers receiving "excessive payments."

Proposed rules

The proposed rules give detailed definitions for applicable entities. According to the proposed rules and FAQs, states, political subdivisions and their agencies and instrumentalities are eligible for direct-pay elections. In addition, cities, counties, water districts, school districts, economic development agencies, and public universities and hospitals that are agencies and instrumentalities of states or political subdivisions are also included in the definition of applicable entities.

The proposed rules confirm that partnerships and S corporations are not "applicable entities," even if they are tax-exempt or governments, so they are ineligible for direct pay unless the credits are for carbon capture projects (45Q), the production of clean hydrogen (45V) or advanced manufacturing (45X).

Claiming elective payments

Under the proposed rules, a taxpayer may not "chain" an election for credits under IRC Section 6417 from other sources. To claim the credit, the taxpayer must own the underlying credit property or conduct activities on which the credit it based. The ownership can be direct, through a disregarded entity or through other types of ownership interests where the taxpayer has an undivided interest or share of the underlying eligible facility property.

The proposed rules further clarify that direct-pay elections cannot be made for credits (1) purchased under IRC Section 6418, (2) transferred under IRC Section 45Q(f)(3), (3) acquired by a lessee from a lessor in a pass-through election, or (4) owned by a third party or otherwise not determined directly by the applicable entity or electing taxpayer.

Making the election

An elective payment election may only be made on an original annual tax return, which must be filed by the due date (including extensions) for the original return for the tax year for which the applicable credit is determined, beginning with tax year 2023. Elective payment elections cannot be made or revised on an amended return or by filing an administrative adjustment request.

The proposed rules describe the requirements for electronic pre-filing registration for eligible taxpayers that want to elect direct pay. The IRS also released temporary rules (TD 9975) that list the requirements and state that the IRS anticipates opening the electronic portal for pre-filing registration in Fall 2023.

Under the pre-filing requirements, taxpayers that want to make a direct-pay election would have to obtain a registration number for each eligible property by supplying the required information about the applicable credits and property. The IRS will review the information and issue a separate registration number for each applicable credit property. The registration number would only be valid for one year and would have to be renewed each year. The registration number would be included on the taxpayer's annual tax return. Once made, the election would be irrevocable and apply to any applicable credit for the tax year for which the election is made.

The proposed rules clarify that the payment cannot apply against estimated tax payments, "because taxpayers can determine, based on their projected tax liability, the correct amount of estimated tax to pay in order to avoid a[n IRC S]ection 6654 or [IRC S]ection 6655 estimated tax penalty at the end of the year," according to the Preamble.

Denial of double benefit

The proposed rules provide electing taxpayers with a methodology to determine the credit amount for the direct-pay election. Under the proposed methodology, the taxpayer would first compute its federal income tax liability and allowed amount of IRC Section 38 credits (general business credits) for the tax year, inclusive of credit carryforwards. The taxpayer would then apply its allowed IRC Section 38 credits against its current year tax liability and determine any amount of excess or unused current-year credits. Finally, the taxpayer would reduce its direct-pay-eligible amount by the amount (if any) allowed as a credit under IRC Section 38.

Partnerships and S corporations

As noted, partnerships and S corporations are not "applicable entities," unless the credits are under IRC Sections 45Q, 45V or 45X. Eligible partnerships or S corporations can make the direct-pay election if they directly hold the facility or property eligible for the credit, make the direct-pay election and receive the direct payment (as opposed to the partners or owners).

The payment would be treated as tax-exempt income and allocated to the partners or shareholders based on their share of the credit as determined under Treas. Reg. Section 1.704-1(b)(4)(ii). The income would be treated as arising from an investment activity, not from the conduct of a trade or business under IRC Section 469(c)(1)(A), and therefore would not be treated as passive income to any partners or shareholders who do not materially participate.

The proposed rules provide that an applicable entity may engage with other entities, including with for-profit partners, in certain types of ownership arrangements while preserving their ability to make a direct-pay election under IRC Section 6417(a) for its share of the applicable credits.

Excessive payments

In the Preamble to the proposed rules, the IRS said that it anticipates that "excessive payments may arise in a variety of situations, such as an improperly claimed bonus credit amount, an error in calculating a credit, inflated basis, failure to apply the [IRC S]ection 38(d) ordering rules, or a misapplication of the credit utilization rules, among other things." If the IRS determines that an excessive payment has been made, the taxpayer's federal income tax for the tax year in which the determination is made would increase by the excessive payment plus 20% of the excessive payment. Taxpayers have the opportunity to demonstrate that the excessive payment resulted from reasonable cause, in which case the 20% excessive payment penalty does not apply.


The proposed rules provide direct-pay-eligible taxpayers with much-needed clarity on the requirements and timing for making an election. The inclusion of state and local government agencies and instrumentalities in the definition of "applicable entity" resolves some uncertainty based on the plain language of IRC Section 6417.

The proposed rules also outline the methodology for taxpayers to determine their direct-pay-eligible amount, which will first offset their current-year tax liability, with any excess credit being refundable. Taxpayers should pay special attention to the pre-filing registration requirements as these requirements are a condition precedent to making an effective direct-pay election. Taxpayers must complete the registration for each eligible facility or property, so it is likely that many taxpayers will need to complete, and possibly renew, multiple registrations each tax year.

Some taxpayers had hoped that there would be a quicker way to get the direct payment. A calendar-year non-profit that generates a tax credit in 2023 would find that its tax return is not due until May 15, 2024. If extended, the deadline could be as far out as December 15, 2024, at which time the non-profit would claim its refund, which would then need to be processed before being paid. This could mean a two-year wait from credit generation to direct payment receipt. Taxpayers will have to evaluate the timing of cash flow when considering investments that generate tax credits eligible for the direct-pay provision.


Contact Information
For additional information concerning this Alert, please contact:
National Tax
   • Greg Matlock, Americas Energy Transition and Renewable Energy Leader (
   • Dorian Hunt (
Americas Power & Utilities Tax Group
   • Brian Murphy, Americas Power & Utilities Tax Leader (
   • Mike Reno (
Tax Credit Investment Advisory Services
   • Michael Bernier (
Credits and incentives and sustainability
   • Paul Naumoff (
   • Akshay Honnatti (
   • David Camerucci (
Exempt Organization Tax Services
   • Stephen Clarke (
   • Melanie McPeak (
   • Kara Adams (
Private Client Services
   • David Kirk (

Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor