Eligible taxpayers (either applicable entities or electing taxpayers) can receive an elective payment (direct payment) in lieu of a tax credit for certain clean energy projects under the Inflation Reduction Act of 2022. An initial set of final regulations (TD 9988) outline the eligible taxpayer and direct payment requirements and a subsequent set of final regulations (TD 10012) allow certain unincorporated organizations owned by applicable entities to elect out of partnership status for federal income tax purposes. Companion proposed regulations (REG-116017-24) outline administrative requirements for the election. Direct payment applies in limited circumstances. For taxable entities, it only applies to the Clean Hydrogen Production Credit (Sec. 45V), the Carbon Oxide Sequestration Credit (Sec. 45Q), and the Advanced Manufacturing Production Credit (Sec. 45X). It applies to a broader range of credits for tax-exempt or governmental entities. The initial set of final regulations also prohibit chaining– where an applicable entity or electing taxpayer would make a Sec. 6417 direct pay election after receiving a credit transfer pursuant to Sec. 6418. However, IRS continues to study the issue.

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