The American Bar Association 2023 May Tax Meeting was held in Washington, DC, over a three-day period. The May Tax Meeting included a number of panel discussions on clean energy credits and incentives in the Inflation Reduction Act (IRA). The panelists for these clean energy discussions consisted of officials from the Department of Treasury and the Joint Committee on Taxation, as well as industry practitioners.
Below are some of the salient highlights from the panel discussions on clean energy tax credits.
Prior to the IRA, only taxable entities could take advantage of the investment tax credits and production tax credits for their qualifying facilities. Tax-exempt entities could not take advantage of these tax credits for the same type of qualifying facilities. However, under the IRA, tax-exempt and certain governmental entities can make a direct pay election and receive a cash refund for the amount of several specified credits, assuming they don’t have sufficient tax liability.
Amber McKenzie, an attorney-advisor at Treasury’s Office of Tax Policy, stated that the Internal Revenue Service (IRS) is in the process of developing an electronic pre-filing registration process for organizations that want to take advantage of direct pay. The pre-filing process will prevent improper payments to fraudsters like criminal syndicates and provide the IRS with basic information to ensure companies, non-profits, states and communities are able to access credits more readily. The IRS plans to launch the electronic pre-filing process this year.
The law also allows taxable entities with tax liability to buy or sell credits, which is also commonly referred to as transferability. However, there is a question as to whether a tax-exempt entity can buy a tax credit and then receive cash payments for it through direct pay. Sarah Haradon, an attorney-advisor at Treasury’s Office of Tax Policy, stated that the Treasury has received numerous comments requesting it to provide guidance on this issue. She stated that the Treasury plans to address this issue in the direct pay and transferability guidance, which Treasury and the IRS expect to issue soon.
Kashi Way, legislation Counsel at the Joint Committee on Taxation, stated that it was not the intent of the statute to permit this type of transaction. He noted that, “it sort of would turn exempt organizations into accommodation parties for this structure.”
In the case of a tax credit eligible property held by a partnership, the partnership must make direct pay and transferability elections with respect to that property. However, it’s not clear whether a partnership can make elections on behalf of exempt organizations and whether a partnership can make different elections for different partners. Treasury officials stated that the guidance will also address these issues.
The panelists also noted that the direct pay statute lists a state or its political subdivision as an “applicable entity” that is eligible for direct pay, but does not specifically mention government “instrumentalities” as applicable entities that are eligible for certain credits via direct pay election. Thus, it is not clear under the statute whether state instrumentalities may also claim the credit. Generally, an “instrumentality” of the state is an independent state body, like a state hospital, that provides a public service. A state college or university is an example of an institution that may be deemed an instrumentality of the state. However, many, if not most, instrumentalities do not have section 501(c)(3) status. Thus, there is a question as to whether such government instrumentalities, like a public university without 501(c)(3)status, can monetize tax credits through a direct pay election.
Treasury officials stated that the guidance will also address whether an instrumentality of the state can monetize its clean energy credits through direct pay.
The guidance will also provide information about the timing and process for making election and receiving payment.
Treasury officials indicated that the direct pay and transferability guidance could potentially be issued by June 21, 2023. This date appears to be some sort of internal Treasury deadline that marks the end of spring 2023. The Treasury officials mentioned this date in connection with the earlier comments by Lily Batchelder, Assistant Secretary for Tax Policy at the Treasury, on March 22, 2023, stating that the direct pay and transferability guidance will be issued in spring 2023.
Carbon Capture, Hydrogen and Clean Fuel
The IRA greatly expanded the technologies eligible for tax credits. After the IRA, renewable energy projects increasingly consist of equipment that may allow for multiple tax credits. In this context, the clean energy panel discussed the unique features of Section 45Q carbon capture and sequestration credits, Section 45V clean hydrogen production credits and Section 45Z clean fuel production credits, as well as potential overlaps and exclusivities that apply between them.
The main takeaway was that the taxpayers will need to engage in (i) an analytical exercise to determine which tax credits may be available for a project, (ii) determine whether tax credits that may be available are mutually exclusive, and (iii) perform a modelling exercise (where tax credits are mutually exclusive) to determine which credits provide the most value, taking into account different credit eligibility periods.
The panelists discussed a base case example of a transportation-fuel ethanol production facility outfitted with a carbon capture unit. Under those facts, a taxpayer cannot claim both a 12-year section 45Q credit and a 3-year section 45Z clean fuels credit if all of the equipment is part of one facility owned by the same taxpayer and credits are claimed for the same tax year. Thus, the taxpayer would need to determine which tax credit provides more value in a given year. On the one hand, a taxpayer can receive direct payments of 45Q credits for five years, which will provide more certainty to lenders and tax equity investors. This could potentially outweigh the uncertain payment flows from monetizing section 45Z credits, even with a higher credit value. On the other hand, a taxpayer using the 5-year direct payment option for section 45Q may permanently lose out on section 45Z credits if the 5-year cycle ends after 2027.
There’s an open question as to whether tax credits can be “stacked,” for example by claiming hydrogen tax credits, section 45Q credits for carbon capture and section 45Z credits for clean fuels, if the hydrogen plant and the carbon capture or fuel production equipment are owned by different parties. The Treasury would need to address this issue in a section 45V guidance.
Energy Storage Technology
The IRA added an investment tax credit for standalone energy storage technology with a minimum capacity of 5 kWh. Energy storage technology includes batteries, but it also applies more broadly to any energy storage technology that receives, stores and delivers energy for conversion to electricity, or to most technology that thermally stores energy (excluding swimming pools, combined heat and power systems, and building structural components).
In the context of energy storage technology, a common question that taxpayers have is whether they can receive investment tax credit for energy storage property co-located with a facility claiming a production tax credit. An industry practitioner noted that the pamphlet released by the Joint Committee on Taxation describing the energy tax changes made by the IRA states that “energy storage property includes property co-located with a facility claiming an electricity production credit to the extent it is separable from such facility.” There’s a question as to what the word separable, as used in the pamphlet, means.
Kashi Way noted that in drafting the "separable" language, the intent was to exclude facilities, such as a hydro facility, in which the technology both produces electricity and serves as a storage device.
Jennifer Bernardini, an attorney-advisor at Treasury’s Office of Tax Policy, stated that Treasury and the IRS are currently working on domestic content guidance, direct pay and transferability guidance, a second round of guidance on wage and apprenticeship requirements, and section 48E guidance. In terms of priority, Treasury and the IRS are planning on first issuing the domestic content guidance, followed by the direct pay and transferability guidance. The rest of the guidance will be issued after that. Ms. Bernardini further noted that Treasury and the IRS are also working on proposed regulations under section 48, which they are aiming to issue this year.
 See Letter from Ted Mitchell, President, American Council on Education to the U.S. Treasury (Nov. 3, 2022) (available at Tax Notes, 2022 TNTF 215-24).