CSG Law Alert: Internal Revenue Service Issues Proposed Rules for Direct Pay and Transfer of Clean Energy Tax Credits

On June 14, 2023, the Internal Revenue Service (“IRS”) issued proposed rules which, if adopted, provide much anticipated details on how entities with low or no tax liability can monetize the Inflation Reduction Act’s (“IRA”) clean energy tax credits using Direct Pay or by transferring tax credits.

The IRS also issued a temporary rule requiring online pre-filing registration for entities that plan to monetize tax credits.

Direct Pay

Under the IRA, Direct Pay allows entities to receive cash in the form of a refund in lieu of credits. The proposed rules clarify that “applicable entities,” meaning those eligible for Direct Pay, would include:

  • Organizations exempt from tax by Section 501(a), such as public charities, labor organizations, and religious organizations; and
  • U.S. territories, the District of Columbia, States, and their political subdivisions, agencies and instrumentalities, such as school districts, economic development agencies, public universities and hospitals.

Entities not eligible as set forth above, can elect to be treated as applicable entities for the purpose of Direct Pay. Partnerships and S Corps can elect to be treated as applicable entities and are subject to additional rules.

Eligible entities can use Direct Pay for most of the clean energy tax credits enumerated in the IRA (including the investment tax credit (“ITC”) and the production tax credit (“PTC”)), whereas entities that elect to be treated as eligible entities can only use Direct Pay for three IRA clean energy tax credits.

Tax Credit Transfers

The IRA also provides for the transfer of tax credits. The proposed rules would allow an entity (other than those eligible for Direct Pay) with any type of tax liability under the IRC to transfer tax credits.

Under the proposed rules, an eligible tax credit includes most of the clean energy credits set forth in the IRA (including the PTC and ITC), as well as applicable bonus credits.

Among other requirements, the proposed rules would require any transfer to be in cash to an unrelated third party with the risk of tax recapture on the buyer.


The summaries above provide a very brief look at the proposed rules.

In the event you have questions regarding these rules please contact your CSG attorney or one of the authors of this alert.

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Renewable Energy & Sustainability