The IRS proposed rules on March 11, 2024, to exclude certain unincorporated organizations owned by applicable entities from being subject to partnership rules as they relate to energy property under the Inflation Reduction Act.
The proposed rules apply to taxable years ending on or after March 11, 2024. Written comments will be accepted through May 10, 2024, and a public hearing on the proposed rules is scheduled for May 20, 2024.
Explore the requirements needed for your organization to meet the proposed exclusion as well as how the guidance could impact your energy-related projects and their tax benefits.
Who Is Affected by the Proposed Regulations?
Under Internal Revenue Code (IRC) Section 6417, applicable entities can receive cash refunds of as much as 70% of the qualifying costs of eligible green energy projects, a benefit referred to within the industry as direct pay or refundable tax credit or what the IRS terms as an elective payment.
Generally, applicable entities include:
- Tax-exempt organizations
- States or political subdivisions
- The Tennessee Valley Authority
- Tribal governments
- Alaska Native Corporations
- Rural electric cooperatives
The proposed rules provide a way for applicable entities to partner with other entities to complete energy projects while also maintaining their ability to claim the direct pay benefit.
Background on the Proposed Regulations
The IRS and the US Department of Treasury published proposed regulations June 21, 2023, to provide guidance on the direct payment of energy tax credits.
Those proposed regulations provided that partnerships, even if made up of two or more applicable entities, aren’t defined as applicable entities under IRC Section 6417 and thus couldn’t utilize direct pay provisions. The only exception was for entities making an elective payment election for hydrogen production, carbon storage, or advanced manufacturing production.
On March 11, the IRS and Treasury published final regulations for direct pay, but in response to comments received, they also issued proposed regulations to provide a way for applicable entities that are members of unincorporated organizations to avail themselves of the direct pay benefits.
For example, if two Tribal nations partner to complete an energy project, the proposed regulations provide a method to allow each Tribe to be eligible for direct pay for their proportional share of the credits generated.
What Changes are Proposed?
The proposed regulations make it possible for unincorporated organizations owned by one or more applicable entities to elect out of the partnership rules outlined in IRC Section 761(a) for purposes of claiming the direct pay benefit under IRC Section 6417.
Requirements for Making the Election
The proposed regulations expand the ability of unincorporated organizations to elect out of the partnership rules to take advantage of the direct benefit if they meet four additional requirements.
- The unincorporated organization must be owned, in part or in full, by one or more applicable entities listed above.
- The unincorporated organization's members must enter into a joint operating agreement, and the members must reserve the right to separately take in kind or dispose of their pro rata shares of the electricity produced, extracted, or used, or any associated renewable energy credits or similar credits.
- The unincorporated organization must be organized exclusively to jointly produce electricity from its applicable credit property under IRC Sections 45, 45U, 45Y, 48, and 48E.
- One or more of the applicable entities will make an elective payment election under IRC Section 6417(a).
Joint Marketing Requirement
The proposed rules also modify a requirement that members of an unincorporated organization can’t jointly sell services or property unless delegated for a period of less than one year.
Under the proposed rules, members of an unincorporated organization would be allowed to delegate the authority to enter a multiyear contract, such as a power purchase agreement, but may not delegate the authority to act on behalf of the members for more than one year. The proposed rules include an example of such an arrangement.
Making the Election
The election for unincorporated entities to avail themselves of the proposed regulations must be made no later than the time required for filing a partnership return. The election must be incorporated or attached to a timely return.
Further, the proposed regulations do provide a mechanism for an unincorporated organization to be deemed to have made the election if not timely filed, but it is facts and circumstances-based and dependent on showing requisite intent.
We’re Here to Help
For guidance on how to apply the proposed rules, contact your Moss Adams professional.
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