The Inflation Reduction Act of 2022 (the “IRA”) made several changes to the tax laws allowing owners to transfer certain manufacturing investment, clean energy investment and production tax credits to unrelated third parties or to elect for direct payment in lieu of the tax credit, if certain requirements are met. Direct payment now allows certain applicable entities (generally, nontaxable entities) that could not benefit from these tax credits to receive an equivalent amount in direct payment from the IRS.
On March 5, 2024, the U.S. Department of the Treasury and the Internal Revenue Service (“IRS”) released the final rules on direct payment. The final rules (RIN 1545-BQ63) provide that applicable entities generally include: tax-exempt organizations, state and local governments, Indian tribal governments, Alaska Native Corporations, the Tennessee Valley Authority and rural electric cooperatives. Most importantly, the final rules include as applicable entities agencies or instrumentalities of state, local, tribal, or territorial government, which means that public universities and public school districts are eligible for direct pay. Accordingly, this could be an opportunity for public universities and public school districts to monetize their tax credits and create additional revenue.
Among the various requirements to be satisfied, applicable entities seeking to receive a direct payment from the IRS must complete the IRA and CHIPS Act of 2022 Pre-filing Registration Tool, which we outlined in a prior post.
If you have any questions about the tax consequences of a repayment, please contact any member of the Tax Practice Group.