Lawyers for Good Government (L4GG), which has been working to expedite the equitable implementation of the Bipartisan Infrastructure Law (BIL) and the Inflation Reduction Act (IRA), celebrates a recent advocacy win that will make millions of dollars in direct pay tax credits available to two-thirds of the country’s cities and counties, school districts, and every single state agency that were previously blocked by conflicting IRS rules.
The Issue:
In 2023, many public sector entities completed clean energy projects (such as buying electric school buses or EVs or constructing rooftop solar) with the expectation of reimbursement through the IRA’s Elective Pay Program, also known as ‘Direct Pay’. Direct Pay gives public sector entities and other tax-exempts the ability, for the first time, to receive a direct payment equal to the full value of tax credits for completing qualifying clean energy projects. Unfortunately, Treasury’s previous guidance, which seemed to contradict the text and intent of the IRA, deemed hundreds of early 2023 projects ineligible based solely on the fact that the applicant’s fiscal years do not match a calendar year.
Treasury’s previous guidance made these projects ineligible for direct pay, which can provide reimbursement of 30-70% of project costs.
This would have meant the loss of millions of dollars in projected revenue for small cities and school districts that were counting on these funds, not to mention every single state agency that placed a clean energy project in early 2023.
The issue impacted approximately two-thirds of all cities and counties, every single state, and many school districts, universities, and nonprofits with eligible 2023 projects that all have Fiscal Years that do not match the calendar year. L4GG had identified hundreds of projects at the state and local level whose Elective Pay credits were at risk as a result of this issue.
The Advocacy:
L4GG led advocacy efforts over the past few months to change the policy, including multiple meetings and sending a letter to the White House, documenting the issue and a proposed solution, in partnership with the Government Finance Officers Association (GFOA) and signed by 48 entities, including 18 cities and counties from 13 states. As a result of L4GG’s initial advocacy, the IRS first issued its Final Rule on March 5, 2024, where it allowed entities to file for Direct Pay on a calendar year to capture all 2023 projects. While this Final Rule enables all entities with 2023 projects to file for Direct Pay, therefore fixing the issue potentially blocking them from receiving tax credits for climate projects, it unfortunately did not provide guidance on how entities whose fiscal years do not align with their calendar year could subsequently realign their tax filings with the entity's pre-existing non-calendar fiscal year. As a result, entities would have had to maintain two sets of accounting records for the next 10 years! L4GG spoke to a number of cities and state agencies who, when notified of the provisions in the Final Rule, decided not to pursue tax credits for their early 2023 projects, simply because the administrative burden of maintaining separate accounting records was too high.
The Policy Change:
Given the input from our clients, L4GG continued informal advocacy via discussions with the White House to ensure new guidance was issued to clarify that fiscal year realignment was available to entities for future calendar years. As a result of our efforts, the IRS issued new guidance on Friday, April 19, 2024 that explicitly confirms that entities will be able to realign future filings in 2024 filings with their fiscal year.
The new guidance, coupled with the Final Rule, commits the IRS to reducing administrative burden on entities, confirming that they will not have to maintain two sets of books for the duration of their Elective Pay filings. The guidance gives them assurance that multiple sets of books is temporary, and reduces their burden going forward. L4GG applauds the action of the IRS to ensure that hundreds of public entities will have access to critical funding for clean energy projects and will rely on Direct Pay in future years.
“By removing this early barrier to collecting earned IRA tax credits, risk-averse states and local actors will now feel more comfortable relying on Elective Pay to finance clean energy projects in the future. These changes will have a huge impact on the early success of the IRA uptake process and will help support the successful rollout of this revolutionary new program.”