April 20, 2024

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IRS finalizes energy tax credit ruling

3 min read
IRS finalizes energy tax credit ruling

The Internal Revenue Service has finalized the rules monetizing clean energy tax credits, which frees up non-profit power companies to issue more debt that can be used to finance electrical infrastructure projects.  

“Elective payment” was created by the Inflation Reduction Act and allows non-profit power companies to use tax credits created through green energy projects to finance upgrades and new projects. In the past, only investor-owned utilities and merchant generators, which supply about 70% of the power in the U.S. and operate as for-profit had access to the credits. 

“We are glad that Treasury and IRS are making progress in implementing the elective pay provisions of the Inflation Reduction Act,” said John Godfrey, senior government relations director, American Public Power Association. “Elective pay has the potential to finally give public power utilities and other governmental entities equal access to federal incentives intended to spur energy investments.” 

“We are glad that Treasury and IRS are making progress in implementing the elective pay provisions of the Inflation Reduction Act,” said John Godfrey, senior government relations director, American Public Power Association. “Elective pay has the potential to finally give public power utilities and other governmental entities equal access to federal incentives intended to spur energy investments.” 

APPA

Finalized guidelines from the IRS put a fine point on guidance they rolled out last June and reflects suggestions made from industry leaders that arrived via over 150 suggestions received during the public comment period. One of the quibbles addressed in the clarification was whether credits should be claimed via a fiscal year versus a calendar year. 

Credits are typically claimed via income tax returns, but municipalities and publicly-owned power companies don’t file tax returns. The new guidance also seeks to clarify rules governing what qualifies as a partnership arrangement that’s eligible to claim the credits. 

The new rules leave some questions unanswered while also holding promise for expanded bond issuance.  APPA members rely heavily on tax exempt municipal bonds for financing infrastructure projects that provide or upgrade power systems. 

“This has the potential to be huge for public power and rural electric cooperatives and governmental entities of all sorts,” said Godfrey. “Governmental entities including public power would likely increase substantially the amount of long-term debt issued to finance projects that would qualify for such credits.” 

The National Association of Bond Lawyers is looking for additional guidance from the feds about tax exempt bond haircuts. “We’re pleased to see Treasury and the IRS work quickly to finalize rules and provide greater certainty,” said Brian Egan, director of government affairs, NABL.

“States, local governments, and tax-exempt organizations, however, still likely have a number of outstanding questions pertaining to these electives pay credits and how they intersect with tax-exempt bond proceeds.”  

NABL was one of the commenters on section 6417 of the guidelines and is expressing concerns about a 15% tax credit reduction when projects are funded by tax-exempt bonds. 

The government is concerned about credit cashers double-dipping, NABL prefers that “the existing rules for allocating tax-exempt bond proceeds should be applied when determining what portion of the cost of an energy project has been financed with tax-exempt bond proceeds.” 

Cashing in the credits is also dependent on using domestically-produced components which is problematic as China remains the world’s number one producer of solar panels. The wind turbine market is dominated by European and Chinese companies. 

“The statute requires that any project seeking to claim elective payment must meet domestic content requirements,” said Godfrey. “Meeting these requirements will be quite challenging from a supply chain standpoint, but also from an administrative standpoint.”