Direct Pay (Elective Pay)

Direct pay is a tax provision that allows applicable entities, such as tax-exempt and governmental entities, to benefit from certain clean energy tax credits even if they do not owe federal income tax. By choosing direct pay, the amount of the credit is treated as a payment of tax and any overpayment will result in a refund.

For example, a local government that makes a clean energy investment that qualifies for the investment tax credit can file an annual tax return with the IRS to claim direct pay for the full value of the credit. The IRS will then make a refund payment in the amount of the credit to the qualifying entity.

The following entities are eligible for direct pay:

  • Tax-exempt organizations

  • States and political subdivisions

  • Indian tribal governments

  • Alaska Native Corporations

  • The Tennessee Valley Authority

  • Rural electric cooperatives

  • U.S. territories and their political subdivisions

  • Agencies and instrumentalities of state, local, tribal and U.S. territorial governments

  • Generally, only applicable entities are eligible for direct pay. However, there are special rules for three of the clean energy tax credits:

    • The section 45Q credit (credit for carbon oxide sequestration)

    • The section 45V credit (credit for production of clean hydrogen)

    • The section 45X credit (advanced manufacturing production credit)

    Under these special rules, other taxpayers that are not applicable entities may make an election to be treated as an applicable entity for direct pay with respect to the applicable credit property giving rise to one of these three credits.

    There are additional rules if the taxpayer is a partnership or S corporation. For example, if a partnership is eligible for direct pay, the election must be made by the partnership, not by the individual partners.

    Steps for election of Direct Pay

  • The entity must obtain an EIN or TIN.

  • The entity must complete the pre-filing registration process through the IRS website.

  • The entity must file their annual tax return and include the elective payment election.

  • The IRS will process the election and issue a payment to the entity.

*Electronic return filing is strongly encouraged, but not required*

*Direct pay is commonly referred to as elective pay*