What is Direct Pay?
Under the Inflation Reduction Act (IRA), tax-exempt and governmental entities – such as cities and towns -- that do not owe Federal income taxes are, for the first time, able to receive a payment equal to the full value of tax credits for building qualifying clean energy projects or making qualifying investments. This is called Direct Pay (also known as Elective Pay).
By filing a return and using Direct Pay, these entities can receive a cash refund from the IRS for certain clean energy projects.
Elective pay applies to projects put into service January 1, 2023 through December 31, 2032, creating a decade of tax opportunity to save money on necessary infrastructure replacements and upgrades while reducing energy costs and carbon emissions.
Unlike competitive grant programs, the overall potential of these tax credits to states and municipalities is unlimited. In most cases, the Investment Tax Credit results in a refund equal to 30% of the project investment.
Most Relevant Tax Credits for Municipalities
Photo courtesy of Lawyers for Good Government
Additional Resources
Credit Amounts and Bonuses
The most common credit is the Investment Tax Credit (ITC). The amount of the ITC is calculated as a base credit of 6% on the investment basis of the project. For example, a town that installs a microgrid with solar and energy storage would be eligible for a 6% base credit on the investment.
If the project meets prevailing wage and apprenticeship (“PWA”) requirements, the credit amount is increased by a multiplier of 5 (so, 30% total).
For the replacement of existing municipal vehicle fleets with new electric vehicles, entities can receive up to $7,500 per light vehicle and up to $40,000 per larger vehicle.
For the investment in charging and fueling infrastructure for alternative vehicles, entities can receive up to 30% credit if PWA requirements are met.
For more information on bonuses see this IRS link.
Process Timeline
Decide filing date: Cities and towns must first decide whether they will file based on a calendar or fiscal year. Filing on a calendar year would enable the entity to potentially receive credit for clean energy projects placed into service at any point during 2023.
Identify qualifying projects: The IRS requires that eligible entities own the asset for which they are seeking credits. To understand if a project owned by an entity qualifies for a particular year, the entity must determine that the project was placed into service. Property is considered to be placed in service when it is “first placed in a condition or state of readiness and availability for a specifically assigned function.”
Pre-register 120 days before filing date: Entities must pre-register with the IRS to obtain a Unique Registration Number for each applicable credit property. The IRS recommends registering 120 days before the filing deadline. This would be July 15th for calendar year filers.
File on November 15th, 2024! For calendar year filers seeking to claim credits for 2023 projects, file Form 990-T, Form 3800, and the applicable source form for calculating and claiming any applicable credits
