Treasury and the IRS issue important new guidance regarding direct pay for clean energy credits

The Tax Law Center at NYU Law
4 min readMar 11, 2024


By Taylor Cranor, Mike Kaercher, and Kyle Sweeney

Last Monday, Treasury and the IRS published three important pieces of guidance related to the Inflation Reduction Act’s direct pay regime. Direct pay allows “applicable entities” with zero or low tax liability — including states, localities, tribes, territories, public utilities, and rural electric co-ops — to earn tax credits for deployment of clean technologies, and turn those credits into checks from the government.

The new pieces of guidance are: (1) final regulations for most of the rules that Treasury and IRS proposed last June, (2) a new proposed regulation on direct pay for property owned through partnerships, and (3) a notice prohibiting “chaining” for the time being while requesting comments on potential permissible uses of chaining in the future (more on this later in the blog post).

The final regulations generally adopt the positions in the proposed rules published in June, so below we highlight three key changes that add flexibility and improve access for new entrants seeking direct pay tax credits. Our analysis focuses on changes that impact governmental entities:

  • Error Correction: The proposed regulations were unforgiving to filing errors. A filer risked losing the entire clean energy tax credit they had claimed if they submitted a form a day late, or transposed digits in a registration number. As the Tax Law Center recommended in our comment on the proposed regulations, the final regulations provide relief for many honest mistakes. Taxpayers who make a timely direct pay election and include all requisite information on the original return will be able to correct errors that would result in a direct payment disallowance and or an inaccurate payment. This is especially important since many applicable entities are claiming tax credits for the first time and are new to the process. Filers should still exercise care, as making the election on an original return is still required, and some mistakes, such as failing to include a registration number on the original return, are not correctible.
  • Fiscal Year Taxpayers: Governmental entities can generally only access tax credits through direct pay. Most IRA credits became available on January 1, 2023, and many cities and other governments acted quickly to place credit-eligible property in service in the first half of 2023. But there was a hitch. Even if all other rules were followed, the statute provides that direct pay is only available for “taxable years beginning after December 31, 2022.” Most governmental entities keep their books on a July-June fiscal year, and entities generally align their fiscal year and tax year. If governmental entities aligned their fiscal year and tax year, their first tax year after December 31, 2022 would have begun on July 1, 2023. This created uncertainty about whether direct pay would work for some of the first movers who placed property into service between January 1 and June 30, 2023. The final regulations clarify that an entity not required to file a Federal income tax return (such as a governmental entity) may file their returns to claim direct pay based on a calendar year. This ensures access to direct pay for property placed in service early in 2023. Entities that initially file their returns based on a calendar year may align their tax year and fiscal year in the future.
  • Partnerships: Treasury and IRS took the position in the proposed rules from last June that direct pay is not available for property owned by partnerships. The proposed rules from last June provided an alternative way for direct pay entities that wanted to co-own property with other entities to do so without losing access to direct pay. The June guidance noted that a partnership with one or more partners seeking direct pay could elect out of partnership status under subchapter K, and instead own the property though a “tenancy-in-common” or joint “operating arrangement.” Comments, including ours, noted that the existing rules for opting out of subchapter K are complex, constraining, and provide insufficient clarity. Treasury and IRS agreed that more guidance was needed and issued a proposed regulation intended to provide more clarity and flexibility for these arrangements, specifically for electricity generation. The proposed rule would allow applicable entities to own, in part or in full, an “unincorporated organization” that holds eligible credit property and then claim direct pay for the applicable credit in accordance with their share of such property. Another pathway for owning property through a partnership is to use a subchapter K partnership structure and sell the credits under the new transferability regime. This partnership structure works for production tax credits, but not for investment tax credits (including credits for vehicles and charging) if a partner is a governmental entity or tax-exempt.

All of these changes are important, and consistent with our comments on last year’s proposed regulations.

In the final regulations, Treasury and the IRS prohibited “chaining,” a structure that would enable applicable entities to buy credits from a for-profit taxpayer and elect direct pay on those credits. While chaining could encourage investment and ensure broader tax credit access to new technologies and smaller businesses, there are reasonable concerns about practical and administrative challenges as well as fraud and abuse. The notice seeks additional comments on how Treasury could allow chaining in appropriate circumstances in the future, meaning that the prohibition could be lifted in part. This would be consistent with the statute, which, as our comment explains, gives Treasury broad discretion in determining whether to allow or disallow chaining in whole or in part. It is sensible for Treasury and the IRS to gather more information about potential tradeoffs before determining how to use its authority.

Both the proposed partnership regulation and the chaining notice are complex, and we are continuing to study them. Comments on the proposed partnership regulation are due in May, and comments on the chaining notice are due in December.

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