Accounting

Direct Pay

Background

Direct Pay, also referred to as Elective Pay, was passed in the Inflation Reduction Act (IRA) in 2022 and allows tax-exempt entities such as states, local governments, and nonprofit organizations to access federal clean energy tax credits for the first time. Direct pay has finally given tax-exempt public and nonprofit entities a real opportunity to bring clean energy’s job-creating and energy cost- and pollution-cutting benefits directly to more communities.

Implementing the provisions of Direct Pay is complex and the State is navigating these parts of the federal tax system for the first time. The Office of Financial Management is providing resources and technical assistance, but also holding state agencies accountable for taking advantage of these new federal incentives. This space is used to provide information and links to resources about Direct Pay, including the pre-filing registration process necessary to take advantage of these tax credits.

What does Direct Pay offer?

Under the IRA rules, 12 applicable tax credits for Direct Pay are in the following four categories.

Energy Generation & Carbon Capture
- Production Tax Credit for Electricity from Renewables (45)
- Clean Electricity Production Tax Credit (45Y) 2025 onwards
- Investment Tax Credit for Energy Property (48) pre-2025
- Clean Electricity Investment Tax Credit (48E) 2025 onwards
- Low-Income Communities Bonus Credits (48e, 48E(h))
- Carbon Oxide Sequestration (45Q)
- Zero-Emission Nuclear Power Production Credits (45U)
Manufacturing
- Advanced Energy Project Credit (48C)
- Advanced Manufacturing Production Credit (45X)
Vehicles
- Credit for Qualified Commercial Clean Vehicles (45W)
- Alternative Fuel Vehicle Refueling Property Credit (30C)
Fuels
- Clean Hydrogen Production Tax Credits(45V)
- Clean Fuel Production Credit (45Z) 2025 onwards

Entities will be able to treat the amount of these credits as a payment against tax on their tax returns and receive them as direct payments from the U.S. Treasury. IRS Publication 5817-G has details of the tax provisions and descriptions of the 12 types of tax credits.

What will I need to do to receive a payment?

The general process and the timelines for direct pay/elective pay are as follows:

Identify and pursue the qualifying project or activity - You will need to know what applicable credit you intend to earn and use elective pay for.
Complete pre-filing registration with the IRS to obtain a registration number for each applicable property.
Satisfy all eligibility requirements for the tax credit and any applicable bonus credits, if applicable, for a given tax year.
Use the tax form 990-T for direct pay/elective pay which is due 4.5 months after the elected tax year closes. Your tax year will determine the due date for your tax return.

Pre-filing Registration

An eligible entity must complete IRS’s pre-registration to help streamline the process during regular filing. Eligible entities obtain a separate registration number for each project site/property to be used on the annual tax return to get the Direct Pay tax credit. The registration numbers required depend on how many applicable credit properties will generate those credits.

In general, you should pre-register:

No earlier than the beginning of the tax period when you earn the credit. For example, if you do a project in 2024, you should only pre-register in the 2025 tax filing season.
After placing an investment property or production facility in service, electricity is produced, or the electric charger is installed and ready to charge vehicles.

IRS Publication 5884 and the FAQs published have detailed information on the pre-filing registration. This external website also has good information about the process.

Here is a step-by-step guidance on the registration process: Direct Pay Pre-filing Registration Step-by-step guidance

Tax credits for Washington State

The provisions of Direct Pay can be found in Sec 8008 of ENGROSSED SUBSTITUTE SENATE BILL 5949 which is the 2023-2025 Supplemental Capital Budget that was passed in March 2024.

IRS Publication 5817 provides a brief description of tax credit provisions for direct pay/elective pay. Initial analysis indicated that tax credits for Washington State fell mainly in three areas:

Investment Tax Credit for Energy Property (48) pre-2025 / Clean Electricity Investment Tax Credit (48E) 2025 onwards
Credit for Qualified Commercial Clean Vehicles (45W)
Alternative Fuel Vehicle Refueling Property Credit (30C)

See brief descriptions of the tax provisions: Brief description of tax credit provisions for Washington State