The GFOA Federal Liaison Center will monitor program implementation and update resources as needed in the sections below. PLEASE NOTE: The new programs are generally still at various stages of agency development; we will strive to post updates when available.
On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA) into law. Although the final version signed into law was a smaller, pared down version of what was initially proposed as the Administration's Build Back Better Act, the IRA still provided significant investments in three areas - climate and energy, healthcare, and tax reform.
Climate and Energy Provisions
The IRA expands, extends and establishes new tax incentives to advance the development and deployment of clean energy. Further, the IRA extends these incentives to entities that generally do not benefit from income tax credits, such as state, local, and Tribal governments and other tax-exempt entities. The law does this through a direct-pay mechanism so that these entities may be able to directly access many of the incentives.
The credits and elective pay option are unique in that tax-exempt and governmental entities that do not owe Federal income taxes will, for the first time, be able to receive a payment equal to the full value of tax credits for building qualifying clean energy projects or making qualifying investments. Elective pay allows entities to get their payment if they meet the requirements for both elective pay and the underlying tax credit.
Applicable entities under the proposed rules include, but are not limited to, States and political subdivisions such as local governments, as well as agencies and instrumentalities of state, local, tribal, and territorial governments (e.g., water districts, school districts, economic development agencies).
In general, only ‘applicable entities’ are eligible for Elective Pay. However, other taxpayers that are not ‘applicable entities’ may elect to be treated as an applicable entity with respect to three tax credits (for carbon oxide sequestration, production of clean hydrogen, or advanced manufacturing).
The U.S. Treasury is expected to publish guidance on the direct pay election process in the near future. Click here to read the GFOA Comments to Treasury in response to the proposed rules. GFOA also submitted joint comments in response to the proposed rules related to the tax credit elections. In order to claim the full direct pay amount available, certain apprenticeship and prevailing wage requirements must be met. The requirements will apply to qualifying facilities, projects, property or equipment that begins construction on or after January 29, 2023. Follow the links below for additional information on these particular requirements:
Clean Electricity and Reducing Carbon Emissions
Clean Energy Manufacturing
Want to Take Advantage of Elective (aka Direct) Pay? Tips to Keep in Mind
- Identify and pursue the qualifying project or activity. You would need to identify what applicable credit you intend to earn, which in turn leads to pursuing the qualifying project or activity. Applicable entities can use elective pay for 12 of the Inflation Reduction Act’s tax credits as described in Q13 of the FAQs. The IRS has released a helpful table (and listed above) with all applicable tax credits for elective pay with more detailed descriptions.
- Determine your tax year. Entities would also need to determine, if not already known, your tax year since that will determine the due date for your tax return. The entities eligible for elective pay (applicable entities) would not normally owe federal income tax. However, by filing a return and using elective pay, these entities can receive tax-free cash payments from the IRS for clean energy tax credits earned, so long as all requirements are met, including pre-filing registration requirements.
- Complete pre-filing registration with the IRS. More information about pre-filing registration is found in Q31 through Q39 in the FAQs. We are still waiting for more information on pre-filing requirements and will continue to provide updates as more guidance becomes available. IRS anticipates providing more information on the process by late 2023.
- Satisfy all eligibility requirements for the tax credit and any applicable bonus credits (if applicable) for a given tax year. Essentially, you would need to place a project in service before making an elective payment election, and you would need the documentation necessary to properly substantiate any underlying tax credit, including if bonus amounts increased the credit.
- Some of the applicable credits are increased if a project pays prevailing wages and uses registered apprentices, if the project meets certain domestic content requirements for steel or iron, and manufactured products, or if a project is in an energy community. (See link above on Prevailing Wage)
Resources from the Administration on Energy Credits and Elective Pay
Guidance/Materials from the Internal Revenue Service (IRS)
Links to access the resources/guidance
Proposed Guidance on the elective pay (aka direct pay) option for certain clean energy tax credits
Proposed Guidance on the transferability of certain clean energy tax credits
Temporary regulation for electronic pre-filing registration requirement (for elective pay and transferring of credits)
More information about pre-filing registration is anticipated by late 2023
Part IV of the report includes a case study on the energy security and clean energy provisions of the IRA.
Guidance on the Qualifying Advanced Energy Project Credit
The guidance includes definitions, descriptions of qualifying advanced energy projects, and a description of the application process.
Guidance on eligibility requirement for energy communities for the bonus credit program under IRA
Initial Guidance Establishing the Program to Allocate Environmental Justice Solar and Wind Capacity Limitation under Section 48(e)
Click here for ongoing updates and the latest information from the Internal Revenue Service (IRS) and its implementation of the IRA.
GFOA Partner Resources
Other Related Funding Opportunities
In addition to the credits discussed previously, the IRA also provides a number of funding opportunities to support the deployment of commercially-available and innovative clean energy technologies, as well as some new programs to help cut air pollution, including greenhouse gases, with a particular focus on the communities that carry a disproportionate pollution burden.
Addressing Climate Pollution
- Caps the annual out-of-pocket costs of prescription drugs for Medicare beneficiaries at $2,000
- Provides free vaccines for Medicare beneficiaries
- Extends Affordable Care Act (ACA) premium subsidies to 2025
Tax Reform Provisions
- $80 billion to enhance Internal Revenue Service taxpayer services, operations and enforcement
- 15 percent alternative minimum tax for corporations earning more than $1 billion annually (except those owned by private equity), and includes a 1 percent excise tax on stock buybacks