Proposed regulations for the electric vehicle tax credit, long overdue, are finally out (REG-120080-22). That checks one of the many clean energy guidance projects off the list from the Inflation Reduction Act (IRA, P.L. 117-169), but there are still plenty more to go, including guidance on the direct pay provision in section 6417.
Direct pay is one of two provisions added by the IRA that is meant to expand the options for financing clean energy projects beyond traditional tax equity deals. There are important questions that need to be answered in guidance before the direct pay option will be available as a practical matter.
This article examines the question of whether direct payment claims and payments might be made on a basis that is more frequent than annually.
The new ability of applicable entities to receive clean energy credits in cash is a major change intended to expand the clean energy production industry to new participants, such as nonprofit entities. If applicable entities are able to claim direct payments on, for example, a quarterly basis, it could make it easier for them to finance their clean energy projects.
Treasury has some leeway in determining when direct pay claims should be submitted. Section 6417 specifies that the due date for applicable entities to make an election is no later than the due date of the return for the tax year for which the election is made or a date specified by the Treasury secretary for entities that don’t file returns. For taxpayers electing the limited-time direct payment of the clean hydrogen, carbon sequestration, and advanced manufacturing credits, guidance will specify when to make the election.
Statutory and Practical Considerations
The reference to the due date of the tax return for the year in which the election is made suggests that the election can be made — and that the payments will go out — annually. Subsection 6417(d)(4) also says that, for entities that aren’t governments or political subdivisions, the payment is treated as made on the later of the date on which the return is filed or the due date of the tax return for the tax year.
For cash flow
flow
purposes, quarterly elections and corresponding quarterly payments would likely be beneficial for applicable entities and taxpayers seeking the clean hydrogen, carbon sequestration, and advanced manufacturing credits. Hanwha Q-Cells USA Inc., a crystalline silicon solar manufacturer, explained that the infusion of cash from allowing the elections and providing payments on a quarterly basis would help producers increase their activities, and since the investment and production credits are based on verifiable investment or output, the credit amounts “could be accurately determined on a more frequent basis than annually.”
Entities that might want to use direct pay are concerned about the possibility that actually receiving the money after making the election could take time and delay projects. Depending on how long it takes the IRS to verify claims, it could add to the entities’ incurred costs by necessitating additional bridge financing to cover the time between the submission of the credit claim and the receipt of the cash. The IRS will naturally want to ensure that the credits are paid appropriately to those who qualify for them and not to those who don’t, but that takes time.
The Energy Infrastructure Council illustrated its concern that a refund from a direct pay election could be delayed with an example: If credits under section 45Q for qualified carbon oxide sequestration are generated beginning in January 2024 and claimed on the 2024 tax return, which is likely filed in the fall of 2025, direct payment on those 45Q credits might not be received until sometime in 2026. That scenario leaves the credit claimant with approximately two years to cover with bridge financing.
How the IRS Might Offer Quarterly Direct Pay Refunds
One of the practical complications of offering payments on a more frequent basis than annually is the possibility of increased errors. The Energy Infrastructure Council proposed that the tentative refund claim process, which uses Form 1139, “Corporation Application for Tentative Refund,” could be the template for a quarterly claim and payment process. The tentative refund procedures allow the IRS to recover amounts that are later deemed excessive as computational errors. The council suggested that the same rule could apply to quarterly elections under section 6417.
Hanwha Q-Cells USA Inc. observed that the IRS already has experience with quarterly refunds under sections 6426 and 6427(i), which allow taxpayers to file claims for the credit for alcohol fuel, biodiesel, and alternative fuel mixtures and the refund for fuel used for nontaxable purposes. Form 8849, “Claim for Refund of Excise Taxes,” can be filed quarterly to claim credits under section 6426. That system could help inform what a quarterly system for the clean energy credits might ultimately look like.
For taxpayers that prefer certainty over speed, the quarterly option should be elective, wrote the Energy Infrastructure Council. If the guidance allows quarterly elections and provides for expedited payments, the applicable entities and taxpayers that do not opt in would not be subject to the computational error correction clawback under this proposal.
Prospective direct pay claimants will have to wait to find out how the guidance will ultimately come out on quarterly elections. It might be a stretch to add this feature to the statutory language, and the additional burden to the IRS of reviewing section 6417 elections and paying on a quarterly basis would seem to weigh against the inclusion of this option in the guidance. But the IRA clearly contemplates expanding the universe of financing options for clean energy projects, and permitting applicable entities to receive quarterly payments of the credits those projects generate would certainly advance that goal.
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