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.
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.
Agency Role
Agencies are responsible for filing tax returns so the state may receive direct pay tax credits. The agency is responsible for:
- Subscribing to the IRS and relevant organizations to receive update about Direct Pay
- Determining at every stage of the project(s) whether legal counsel or subject matter experts will be needed to help with determining eligibility and completing tax returns. Procure the necessary services accordingly.
- Identifying projects that qualify for direct pay tax credits and reporting this information to OFM during the budget process and once the work completed and placed in service.
- Preregistering for direct pay tax credits for each eligible project.
- Submitting tax return for direct pay tax credits for each eligible project.
- Sharing a copy of the pre-filing and the tax return with OFM for tracking and reporting to the Legislature.
- Depositing tax credit money to Fund 28V - Inflation Reduction Elective Pay Account.
Process and Timeline of First Tax Return
Agencies to identify qualifying projects:
- In early 2024 OFM requested that agencies identify projects that qualify for direct pay tax credits and report this information to OFM. This list was revisited and updated in June 2024 in order to support OFM’s requirement to report information about direct pay tax credits to the legislature by July 1, 2024.
- The next OFM direct pay tax credit report to the legislature is due on June 30, 2025.
- A summary of tax return(s) submitted for the fiscal year ended (include a list of projects claimed, total dollar value of projects and total dollar amount of credits sought).
- Agencies will use state fiscal year as their tax year. The tax returns are due on November 15th and if there’s an extension granted, May 15th of the following year.
Annual Timeline
Agencies can work on the tax return as soon as the IRS opens the portal for the tax year. This is typically about three months before the end of the tax year. The pre-filing work coincides with yearend closing and budget build, so we encourage agencies to complete this step as soon as they know the project is placed in service and the IRS portal is open.
| April - May | OFM sends request to agencies to submit list of projects placed in service for the fiscal year. Agencies provide this list and make sure there are documents are on file and ready for filing. |
| April - September | Agencies assign appropriate staff to enter project information into the IRS portal to complete the pre-filing step. |
| October 15 | Pre-filing completed and reviewed by the IRS and ready to do submit the tax return. If not, submit a request for an extension to the IRS by November 15th. |
| November 15 |
Tax return(s) submitted or request for an extension is filed. Send a copy of the tax return to OFM for reporting purposes. If there is an extension granted, agency is required to submit a plan to OFM on when the tax return will get done to meet the May 15th deadline of the following year. |
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
Pre-Filing Registration System
- Register for elective payment or transfer of credits | Internal Revenue Service
- Publication 5884, Inflation Reduction Act (IRA) and CHIPS Act of 2022 (CHIPS) Pre-Filing Registration Tool User Guide
- Publication 5902, Clean Energy Authorization Permission Management User Guide
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
Form 990-T for Elective Payment Election Only Presentation
Applicable entities filing Form 990-T by mail
Elective pay and transferability | Internal Revenue Service (irs.gov)
Instructions for Filing Form 3800 for Certain 2023 Short Tax Years (irs.gov)
Register for elective payment or transfer of credits | Internal Revenue Service (irs.gov)
Publication 5902 (Rev. 1-2024) (irs.gov)
Publication 5817_Elective Pay Overview
Publication 5817-A_Rural Electric Cooperatives
Publication 5817-B_ U.S. Territorial Governments
Publication 5817-C_Alaska Native Corporations
Publication 5817-D_Tax-Exempt Organizations
Publication 5817-E_State and Local Governments
Publication 5817-F_Indian Tribal Governments
Publication 5817-G_Elective Pay Eligible Tax Credits
Publication 5902_Clean Energy Authorization Permission Management
E-file options | Internal Revenue Service (irs.gov)
Frequently Asked Questions
- Use of employee personal information to complete registration and tax returns: what are the implications and can employee refuse to register/file under their name?
Agency will need a main preparer, a backup, and a signer for the tax return.
Response: Employee is acting in their official capacity, not a personal liability
- Who should sign the tax return for the agency filing? And what risks/liabilities would be implied?
Response: Agency head/designee at director’s level
Employee is acting in their official capacity, not a personal liability
- Can this process be centralized (at OFM)?
Response: whoever owns the property is the one to file under their own tax identification number
- The University already files a tax return annually and the credits from Direct Pay could help offset any tax liability. Would the University still be required to deposit the Direct Pay incentive portion to fund 28V - Inflation Reduction Elective Pay Account per ESB 6098.
Response: Sec. 5, which creates the account, does not provide for any exceptions. So on the plain meaning of the section, if the funds are received from elective pay provided under the federal act, the funds “must” be deposited into that account.
- For an entity like the University, does the requirement to deposit Direct Pay tax credits in fund 28V apply to projects that are not funded by the state (such as money from donors or local accounts)?
Response: If the project is not funded by state money, then the money received back does not need to be deposited into the account. Although money provided through private donations are not state funds, money in local accounts may or may not be state funds. They should check with accounting to help make that determination.
For questions and additional guidance, please contact Rachel.Knutson@ofm.wa.gov
