Breaking News: Treasury and IRS Release Final Regulations for Clean Energy Tax Credits

The Department of the Treasury and the Internal Revenue Service (“IRS”) have introduced final regulations allowing certain entities co-owning clean energy projects to access tax credits through elective pay, also known as direct pay.

Previously, many entities that now qualify for this option could not benefit from clean energy tax credits due to a lack of federal tax liability. Elective pay enables these organizations to receive the full value of clean energy incentives by refunding specific credits.

The new regulations offer significant clarity and flexibility for organizations investing jointly in clean energy projects. This includes scenarios where a tax-exempt organization collaborates with a for-profit developer or multiple tax-exempt entities invest together.

A key update to the current partnership tax rules allows co-owners of clean energy projects to choose not to be classified as partnerships for tax purposes, providing them with additional operational flexibility. While partnerships typically cannot utilize elective pay, eligible co-owners can opt out of this classification to gain access to the credits tied to their project’s share. Co-owners not eligible for elective pay can still transfer their share of the credits through existing transferability rules.

The regulations also clarify that co-ownership arrangements may be structured to manage and operate properties generating any clean energy tax credits eligible for elective pay. Importantly, these arrangements can now include non-corporate entities, such as limited liability companies.

In addition to the finalized regulations, the Treasury and IRS have proposed further administrative requirements for unincorporated organizations that opt out of partnership treatment. The IRS invites comments on this proposed rulemaking before finalizing the regulations.

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