The Act added section 6417 to the Internal Revenue Code. This provision allows applicable entities to monetize tax credits that would have previously been of little to no monetary value. The use of direct pay unlocks a world of opportunity for tax-exempt entities to benefit from investing in renewable energy property.

Section 6417 defines an applicable entity as any of the following:

• Any organization exempt from tax imposed by subtitle A;
• Any state or political subdivision thereof;
• The Tennessee Valley Authority;
• An Indian tribal government;
• Any Alaska native corporation; or
• Any corporation operating on a cooperative basis which is engaged in furnishing electric energy to persons in rural areas.

Additionally, section 6417 provides that the following credits are available for a section 6417 elective payment:

• Section 30C “Alternative fuel refueling property credit”
• Section 45(a) “Renewable electricity production credit (PTC)”
• Section 45Q “Credit for carbon oxide sequestration”
• Section 45U “Zero-emission nuclear power production credit”
• Section 45V “Credit for production of clean hydrogen”
• Section 45W “Qualified commercial clean vehicles credit”
• Section 45X “Credit for advanced manufacturing production”
• Section 45Y “Clean electricity production credit”
• Section 45Z “Clean fuel production credit”
• Section 48 “Energy credit (ITC)”
• Section 48C “Qualifying advanced energy project credit”
• Section 48E “Clean energy investment credit”

For tax years beginning after Dec. 31, 2022, applicable entities will be able to make elective payments for the applicable credits listed above. Section 6417(a) provides that an applicable entity making the election will be treated as if it made an income tax payment. That payment may be refunded, but may first be required to offset unrelated business income tax. Applicable entities should be thoughtful of placed in service dates or other events that give rise to credits to avoid generating credits in a tax year when the credit cannot be monetized.

Additional guidance is needed to clarify the form(s) and/or process that will be used to make elective payments as this is a new procedure for tax purposes. For applicable entities with tax return filing requirements, an election for direct pay must not be made later than the due date (including extensions of time) for the return of tax for the taxable year for which the election is made, but in no event earlier than Feb. 12, 2023. For applicable entities without a tax return filing requirement, additional guidance is needed to determine the election’s due date.

Exempt organizations may also be shareholders in passthrough entities (e.g., partnerships, S corporations). If an applicable credit is determined with respect to a passthrough entity and an applicable entity is a shareholder, an elective payment could potentially still be available for that shareholder.  

There is no requirement that an applicable entity have unrelated business income to make an elective payment with respect to applicable credits. Additionally, tax-exempt entities do not have to use the potentially qualifying property in an unrelated trade or business for the allowable credits to be eligible for direct pay. Although property used by states and political subdivisions usually cannot generate certain federal income tax credits, this prohibition is disregarded for purposes of direct pay.

Links for Churches : The direct Pay program is being rolled out . Final details are forthcoming

Recording of Climate and Energy Resources for Faith Communities: A Briefing with the U.S. Department of Energy Briefing Direct Pay IRS guidance
IRS Factsheet
BlueGreen Alliance Direct Pay User Guide
Environment & Energy Studies Institute  direct pay overview
The Congressional Progressive Caucus Center has this direct pay FAQ
Holland & Knight offers this direct pay overview