The Inflation Reduction Act of 2022 (“IRA”) offers various tax credits to incentivize individuals, businesses, and tax-exempt organizations alike to transition to clean energy sources. While tax credits are a great incentive for tax-paying individuals and businesses, tax-exempt and governmental entities are generally unable to claim such credits because they do not typically pay federal income tax. A great feature of the IRA is that it enables tax-exempt and other qualifying entities that have no tax liability to take advantage of these credits through a process called elective pay. Through the elective pay option, the IRS treats the amount of any qualifying credit as a tax payment, and any overpayment of tax results in a refund to the qualifying entity. Although the availability of the credit and the elective pay option were made clear, the mechanism by which qualifying entities would ultimately claim these credits remained uncertain until recently.
During December 2023, the IRS announced the opening of an IRA Pre-Filing Registration Tool that qualifying entities must use if they intend to select the elective pay option. The Pre-Filing Registration Tool is a web-based registration portal. The pre-filing registration process will provide entities with a required registration number that is reported on the entity’s annual tax return on which the elective pay election is made. The IRS also issued Publication 5884, an IRA Pre-Filing Registration Tool User Guide and Instructions, with step-by-step instructions for completing the registration process, including screenshots. The process begins by verifying the personal identity of the individual filing the registration through an IRS ID.me account. Registrants can easily create an ID.me account if they don’t already have one, but be sure to have photo identification on hand. Once a registrant’s personal identity is verified, the next step is to create a clean energy account for the entity that intends to claim the credit. Remember to have the entity’s Employer Identification Number (“EIN”), full legal name, and address readily available. Once the entity’s clean energy account is created, you will complete the IRA credit registration. Registrants will be required to report a variety of information and supporting documents that are unique to the specific clean energy credit being claimed, as well as general entity information such as the tax period, entity type, banking information, and tax returns typically filed. Supporting documentation can be uploaded, if required, within the registration portal. For a complete list of supporting documents required, refer to the Pre-Filing Registration Tool User Guide and Instructions.
Keep in mind that the tax credit must be claimed on the tax return covering the year in which the credit was earned. The credit is considered earned when the clean energy investment project has been completed and placed in service. Taxpayers should complete and submit the pre-filing registration no earlier than the beginning of the tax year in which they will earn the credit. Unsurprisingly, the IRS expects processing delays and has cautioned taxpayers to register using the Pre-Filing Registration Tool at least 120 days prior to when the entity plans to file its tax return on which it will make the elective pay election. The IRS may request additional information upon review of the filing, so the IRS recommends visiting the entity’s clean energy account weekly to keep track of the status of the registration filing and any follow up comments or requests, which will be posted to the clean energy account dashboard. Registrants can also opt to receive email notifications when there is a status change to the registration filing. Once the filing is approved, the registration number will be available on the entity’s clean energy account dashboard.
As mentioned above, the registration number is required to be filed on the entity’s tax return in the year in which the elective pay election is made. For entities that normally file a Form 990, Return of Organization Exempt from Income Tax, the entity will also be required to file a Form 990-T, Exempt Organization Business Income Tax Return. The election for elective pay will be made within Form 990-T, Part III, Tax and Payments, line 6g. The annual tax return must also include all relevant source credit forms, showing the computation of the credit, and Form 3800, General Business Credits, which summarizes the credit and will link the entity’s registration number with the credit computation. The elective payment election must be made on a timely filed return, which includes the available six-month extension request made on Form 8868, Application for Automatic Extension for Time to File an Exempt Organization Return. While the IRA offers the opportunity for tax-exempt entities to take advantage of clean energy tax credits using elective pay, there are hoops the entity needs to jump through before such credits can be claimed and monetized. You need to consider both when your clean energy project was or will be completed and placed in service, and when you intend to file your claim for the associated tax credits. Next, ensure you complete the pre-filing registration process as far in advance as possible, to ensure that you receive the registration number in time to file your elective pay election on the applicable required annual tax return.
Some helpful links to the IRS website and IRS releases and other content related to this process are included below for reference:
- For a complete list of available IRA clean energy credits, click here.
- For more information regarding the elective pay option, click here.
- For more information regarding the IRA Pre-Filing Registration Tool, click here.
- To access the IRA Pre-Filing Registration Tool, click here.
Lauren Grandinetti
Supervisor
Lauren has been a member of Cerini & Associates’ audit and consulting practice area for over five years where she focuses on serving nonprofit, healthcare, education and contractor clients. Lauren has experience performing assurance work, outsourced accounting work, and government filings. Lauren brings her expertise, diversified background, and helpful approach to all of her engagements.
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