Enacted in August 2022, the Inflation Reduction Act (the “IRA”) expanded energy tax credits by increasing credit amounts across the board and broadening eligibility criteria to include new technologies. 

Notably, the IRA allows firms to develop and sell energy tax credits, as outlined here. The IRA also established a “direct pay” system that allows non-profits and governmental entities with no tax liability to receive cash refunds in lieu of credits.

Although partnerships are generally ineligible for direct pay, guidance released on November 20, available here, finalizes rules that allow jointly operated projects to elect out of partnership treatment, providing a pathway for tax-exempt entities to join with taxable investors for their capital and expertise.

Organizations established to own and operate credit-eligible facilities that include at least one owner that is eligible for direct pay can elect out of partnership treatment by entering into a joint operating agreement to take in kind their pro rata shares of electricity produced and any associated credits. Generally, organizations can elect out of partnership treatment as long as they are not treated as corporations for tax purposes and the owners can compute income without having to compute partnership taxable income.

The final rules also address the one-year limitation on an owner’s ability to delegate authority to sell its share of electricity, clarifying that the owner’s agent may enter into contracts to sell the electricity for a term longer than one year, as long as the owner’s delegation of authority to the agent does not exceed one year. The rules include an example illustrating this limitation. Additionally, the guidance package includes proposed rules that detail the statement that the organization files with its annual partnership tax return to elect out of partnership treatment.

In our last update, available here, we highlighted that Trump’s tax plan, with its emphasis on corporate tax cuts and simplifying international taxes, aims to eliminate the energy tax credits that have gained significant traction over the past two years. As a result, Treasury is working quickly to finalize the outstanding guidance before year-end.

On December 4, the IRS finalized the rules on the energy investment tax credit (“ITC”), available here. Originally enacted during the Bush administration to support solar and wind projects, the ITC has been enhanced and extended through subsequent legislation. Set to sunset in 2025, the ITC will be replaced by the IRA’s technology-neutral electricity tax credits, as we discussed here.  

Taxpayers can still claim the ITC for eligible projects that begin construction in 2024. Treasury aims to finalize guidance on the successor to the ITC by year-end, noting in a recent press release that these new technology-neutral credits will eliminate the need for periodic ITC extensions, which should make it easier for developers to secure project financing.

The final rules on the ITC clarify eligibility criteria and address key questions regarding geothermal, biogas, and hydrogen, confirming that stored hydrogen does not need to be used solely for energy to qualify for the credit. The rules also resolve essential ownership issues, such as confirming that an ITC can be claimed for energy storage technology that shares certain equipment with a facility that is also claiming a production tax credit (“PTC”).

Despite this progress, the future of energy tax credits remains uncertain under the Trump administration. There is evidence, however, that the IRA’s clean energy incentives have gained bipartisan support—especially for biogas, which benefits rural areas, and for consumer credits like the credit for electric vehicles. As a result, it seems more likely that these credits may be scaled back rather than fully repealed. One proposal is to tighten eligibility by preventing companies from claiming credits if they are owned by entities in certain foreign countries, similar to the Department of Energy’s loan programs.

As for sales of credits—there is already an established market for them, which makes it unlikely that sales of credits will be eliminated entirely. However, buyers should ensure that their agreements address potential changes in law, particularly for sales of future credits. Still, it is unlikely that any repeal would have retroactive effect, so we may see sales of energy tax credits continue well into 2025, particularly with the rollout of the new technology-neutral credits.

While the future of energy tax credits hangs in the balance, Treasury won’t be the ones dropping the ball as we ring in the new year.