Direct Pay Final Rules: Ownership Decides the Credit

Treasury and the IRS released the final elective pay regulations on March 5, 2024, published in the Federal Register on March 11. For tax-exempt owners, ownership governs everything else. You can claim the credit as a payment only for property your organization owns and the activity your organization conducts, and the final rules settle that. A credit determined for someone else, including a developer under a power purchase agreement, isn’t available to you.

The rest is procedure, and procedure is what ends most of these claims.

Who counts as an applicable entity

The regulations list them: organizations exempt from income tax under subchapter F, governments of U.S. territories and their political subdivisions, states and the District of Columbia and their political subdivisions, Indian tribal governments and their subdivisions, Alaska Native Corporations, the Tennessee Valley Authority, rural electric cooperatives, and agencies and instrumentalities of those governmental entities.

School districts, cities, counties, churches, hospitals, housing authorities, and 501(c)(3) organizations are in. That was never seriously in doubt, but the definitions matter for instrumentalities and joint entities.

The ownership rule, and the two structures that work around it

The regulations say a credit is determined with respect to an entity if the entity owns the credit property and conducts the activities giving rise to the credit. No election is available for credits transferred from someone else, or owned by a third party.

Two structures survive that rule and both are useful for shared projects. An applicable entity may elect for property held by a disregarded entity it owns. And where several entities own a project through a tenancy in common, or through an organization that has validly elected out of partnership treatment, each entity’s undivided share is treated as separate property it owns.

Partnerships themselves are not applicable entities, and the regulations are emphatic: that holds no matter how many of the partners are applicable entities, even if all of them are. A nonprofit that joins a partnership to build a project has generally moved the credit out of reach of direct pay.

The deadline rules that end claims

These rules end claims on their own, and they interact.

The election lives on an original return. It must be made on an original return, including a superseding return, filed no later than the due date with extensions. It can’t be made for the first time on an amended return, can’t be withdrawn on one, and can’t be made through an administrative adjustment request. A numerical error can be corrected later, but only if there was a real item to correct. A blank line or an item marked available upon request can’t be cured.

There is no discretionary late relief. The regulations remove Section 301.9100-1 and 301.9100-3 relief for a late election. The only path is the automatic six month window under 301.9100-2(b), and it’s available only to an entity that filed on time and did not take an extension.

The due date depends on what kind of entity you are. An entity with no income tax return requirement and no annual information return requirement files by the 15th day of the fifth month after year end, with an automatic paperless six month extension. Everyone else uses the ordinary due date with extensions, which means actually filing Form 8868 to extend Form 990-T.

A 501(c)(3) with a filing obligation doesn’t have the paperless extension, and assuming it does can put the election past the deadline with no fallback.

What the return looks like

The election is made on the annual return, which for most applicable entities is Form 990-T. Attach the source credit form, usually Form 3468 for an investment credit project, and Form 3800. The pre-filing registration number for each property has to appear on both the source form and Form 3800, or the election is ineffective. An overpayment shows up on Form 990-T and is paid out, with Form 8050 attached if you want direct deposit.

The 20% addition, and how a credit gets reduced

If the IRS determines an elective payment was excessive, tax is increased by the excessive amount plus 20% of it, in the year of the determination, whether or not the entity is otherwise subject to income tax. The 20% is waived if the entity shows the excess resulted from reasonable cause. The repayment itself is not.

Two other reductions can cut the number a project budget is built on:

• Tax-exempt bond financing reduces the credit by the lesser of 15% or the bond-financed share of the project’s capital additions. A project 5% bond financed takes a 5% reduction, not 15%.
• Grants and forgivable loans awarded for the specific purpose of acquiring the property are included in basis, but if that funding plus the credit would exceed the cost of the property, the credit is cut back so the two together equal the cost. Whether a grant counts is tested when the grant is awarded, and for a loan, when the loan is approved.

The two facts to check first

Check who holds title to the system, and which due date your organization files under. Get either one wrong and there’s no claim to file.

This article is general information, not tax advice, and it reflects IRS guidance as of March 11, 2024. Deadlines and eligibility depend on your organization's tax year and entity type. Please confirm your own facts with a qualified tax professional before relying on anything here.