What you need to know about the IRA: Elective/Direct Pay

What is elective pay?

With a mix of federal funding and tax credits, the Inflation Reduction Act includes a new mechanism called elective or direct pay for tax-exempt entities — local governments, tribal nations, 501(c)(3) organizations, religious 501(d) organizations, and rural energy cooperatives — to take advantage of many of the new clean energy tax incentives included in the law.

Why there are two names: When the Inflation Reduction Act bill passed, it named this mechanism direct pay however the IRS already had something in place called direct pay so they started calling it elective pay. We used to call it direct pay, but have changed to elective pay due to IRS guidance.

What is eligible for elective pay?

There are two ways elective pay will be most helpful for tax-exempt entities: electric vehicles and renewable energy systems. View the IRS full list of clean energy eligible tax credits [PDF]

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January 2024 Update: The pre-registration portal is now open for tax-exempt entities to register their eligible projects for elective pay.

The U.S. Treasury Department shared a press release in with links to helpful information.
A Pre-Filing Registration Tool User Guide [PDF] is available for download.

June 2023 Update: IRS released guidance on elective pay and transferability. They're working on implementing these options and will provide more information about how to claim these clean energy tax credits in late 2023.

March 2023 Update: Assistant Secretary for Tax Policy Lily Batchelder gave remarks on implementation of the Inflation Reduction Act, including elective pay guidance. Batchelder said the IRS is creating a prefiling process for organizations that will allow them to access elective pay. More to come!

Electric Vehicles

The Inflation Reduction Act creates a new credit for qualified commercial vehicles whereby tax-exempt entities will receive a payment of up to 30% of the cost of a qualified vehicle.

There is a payment limit:

$7,500 for vehicles with a gross weight of fewer than 14,000 pounds (fleet cars, heavy-duty trucks).
$40,000 limit for vehicles at or above that weight (school buses, utility bucket trucks, fire trucks).

Renewable Energy Systems

For renewable energy projects, the elective pay option also applies to the Production Tax Credit and the Investment Tax Credit, both of which are primary investment credits used to help finance renewable energy projects.

Tax-exempt entities that finance a clean energy capital project, such as a solar array, are eligible to receive up to 30% of the cost of the project paid for from the Department of the Treasury.

If the tax-exempt entity receives a grant for the project, they are eligible for the full elective payment up to the cost of the project. For example, if a school district receives an $80,000 Solar for Schools grant (for a $100,000 solar array), they would receive a $20,000 elective payment. Without a grant, the district would receive $30,000 elective pay for the solar array.

Why is elective pay important?

Historically, only taxpaying entities were able to take advantage of renewable energy tax incentives, but this legislation levels the playing field between taxpaying and non-taxpaying entities and opens the door for everyone to access these incentives.

Additionally, it incentivizes ownership from day one, instead of utilizing Power Purchase Agreements.

How to apply for elective pay?

From the MN Department of Commerce Direct Pay Guide [PDF]

Determine whether you are an eligible entity (also known as “Applicable Entity”): Tax exempt orgs: 501(a), including 501(c) and 501(d) organizations; States or political subdivisions (agencies, public ed., local governments, port authorities, public libraries, etc.); Agents and instrumentalities of the state (utilities, e.g.); Tribal governments; Rural co-ops (engaging in providing electricity in rural areas).
NOTE: partnerships are not applicable entities, although joint or tenancy in common ownership models may allow an effective (not legal) partnership.
Understand what types of projects are eligible [PDF].
Understand bonus stackable credits within the IRA.
Project selection:
1. Re-evaluate projects in development to determine whether they can be adjusted to qualify for elective pay, or
2. Plan an eligible project that maximizes funding potential while meeting your goals
Find financing. You can stack elective pay with other financing, but elective pay amount will be adjusted
down so that you do not exceed 100% of the project cost. You'll need to both cover the gap (elective pay, at its best, covers 70% of a project cost) and get bridge financing to carry you until you receive payment from the IRS (estimates are 12-18 months).
Complete your project and place project in service.
Determine your tax year to determine tax filing deadlines.
Gather relevant documentation for elective pay filing.
Complete a pre-filing registration and then receive registration ID for each eligible property.
File to take election.
1. A 990-T is the form for entities that are not required to ordinarily file tax returns.
2. Form 3800 with registration IDs for each property.
Receive payment after submission is approved.

Updated 4/8/2025

Want to know more?

Email us! Send us your questions or resources you find useful, like Lawyers for Good Government's resource page on Elective Pay and the IRA.

Please note: We're sharing resources to assist Minnesotans who are seeking information about federal funding opportunities. These resources are based on preliminary information released by the federal government. Program information may change as more guidance is provided by federal and state governments. For specific information on federal funding, please visit the relevant U.S. Government websites.

Visit our guide to the clean energy incentives within the Inflation Reduction Act.

GUIDE TO THE INFLATION REDUCTION ACT

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