Recommendations for Direct Pay for IRA Projects
At the time of writing, the federal tax credits continue to be alive one month into this new administration, but I won’t say “…and well”. That’s because it’s clear all the IRA tax credits having to do with clean energy are being discussed for elimination, and because some IRS staff are being cut along with the rest of the federal workforce.
Here’s what I’ve been telling people, and the way I see it. It’s far more likely than not, even in this policy environment, that the current tax credits will remain in place this year. That is because one has to change federal law to change the tax code, and that will require a bill to pass both houses of Congress through the process of reconciliation. That process is in fact how the IRA passed in 2022, and in the end, it only passed by a single vote in the Senate after years of negotiation. That doesn’t mean it can’t happen again, now, and I actually expect it to this year, but not without a lot of wrangling. And I haven’t written off the IRA completely, including the Direct pay provisions you are interested in. There is still support for different aspects of the bill, and it only seems to be increasing in this political environment, not decreasing.
So I (and others, see links below) say it’s likely for the IRA tax credits to remain for projects placed in service this year, but of course there is risk. Normally, any tax changes made in one year don’t go into effect until the next tax year to allow for market certainty, but these don’t seem like normal times. Here is what I am recommending to nonprofits to mitigate risk for those that are interested…
1) Try to complete your project in 2025, and the earlier in the year, the better. If a project is completed prior to tax code changes, the federal government is vested to uphold their financial responsibility. It’s a constitutional issue at that point.
2) Use the principles of “Safe Harbor” for your project. This is a common IRS practice that states when an owner has either paid 10% of its total project cost or physically started construction of a project, that is the date that the project is subject to the tax code in place at that time, regardless of completion. For solar projects, it’s pretty common to pay that much upfront when you sign a contract, so this is actually pretty common whether folks realize it or not. It’s not as high a standard as point 1 above, but it’s a long standing and well-understood practice and norm that one hopes would hold.
3) Document, document, document! No matter what happens, we foresee increased scrutiny of IRS applications, so well documenting your project through time is even more important. This is especially true with the low income and domestic content bonus tax credits that are currently available.
4) Expect delays. I think this should make sense to anyone right now, but when you lay off a bunch of employees and create policy uncertainty for the rest, it’s going to delay service of your product, whatever that is. Because of that, I fully expect there will be delays in filing and receiving Direct pay in 2026, and probably this year too. Just plan for that in terms of when you expect your payback.
5) Work with a tax service provider for filing, and work with them early. Even last year, it was difficult for nonprofits to file for Direct pay on their own, but some of them were able to. In this environment, I’m recommending to all to work with a tax professional for filing.
Linked belows are some resources from Lawyers For Good Government, the Progressive Caucus Center, and others. Those national groups have really helped with Direct pay filing assistance, and I believe will continue to be of assistance in the coming months.
Clean Energy Group Direct Pay Fact Sheet
L4GG Guidance Brief: IRA Credits, Direct Pay, and the 2024 elections
L4GG Guidance Brief: Overview of Bonus Incentives for ITC/PTC Projects (Wind/Solar/Geothermal)