The Inflation Reduction Act of 2022 (IRA) is the largest energy incentive effort in U.S. history, creating an environment where many energy-related projects are significantly more attractive and easier to fund. The credits offered through IRA represent a financial offset for qualified construction or production costs. The credits start at a base level amount and can be significantly increased if a project employs apprentices and pays prevailing wages.
Certain tax exempt and governmental entities were previously not able to directly take advantage of prior tax incentives for clean energy projects. The IRA added IRC §6417 to allow direct pay provisions for several of the clean energy incentives. State or political subdivisions, tax exempt entities, and Indian tribal governments, along with others, are now eligible to receive direct pay for IRA incentives. Only entities defined as applicable entities under §6417 are eligible for the direct pay provisions. Instrumentalities are specifically referenced in the IRA under other amendments but were excluded from the definition of an applicable (meaning eligible) entity under the §6417 provisions. This leaves instrumentalities unclear whether they were intentionally left out of the direct pay provision in the IRA or if it was an oversight. Clarification is currently being sought by several associations typically classified as instrumentalities.
Public schools, libraries, hospitals, and other special districts may be considered instrumentalities and are eagerly awaiting guidance from the IRS on the direct pay provision for instrumentalities to determine whether they are eligible. The good news is, instrumentalities can take advantage of IRA energy tax credits, however, their path to claiming credits may not be as straightforward as other entities. At present, before additional expected guidance, instrumentalities appear not eligible for direct pay given the lack of reference under §6417.
IRA is complex and guidance continues to be rolled out. This is why working with an IRA advisor can help. Baker Tilly’s team of IRA specialists can help instrumentalities and other entities, navigate the complexities of IRA and evaluate how current and planned projects can leverage the credits available.