Electric cooperatives now have access to direct-pay tax credits to deploy innovative energy projects under a final rule published Monday by the Treasury Department.

“For the first time ever, electric co-ops are able to directly take advantage of the energy tax credits that were afforded to for-profit companies for years,” said NRECA Legislative Affairs Director Paul Gutierrez.

In 2022, Congress passed legislation that included a provision pushed by NRECA that would provide direct federal payments to co-ops when they deploy new energy technologies, including carbon capture, nuclear, energy storage, renewables and more.

Since then, with input from co-ops, the Treasury has been working to formulate a detailed rule to govern how the program works. The department listened to what NRECA and its members had to say and incorporated much of their advice into the final rule, Gutierrez said. The IRS refers to direct-pay as “elective payments” in its rule.

Among the big wins for co-ops is the ability to tap into a wealth of federal grants and loans created by recent legislation without having that money count against the direct-pay credits they receive, Gutierrez said.

“In general, you can stack the tax credits on top of the grants without being penalized,” he said.

Although electric co-ops may pursue both grants and direct-pay tax credits, the grant money combined with the tax credit cannot exceed the total cost of the project or the tax credit amount will be reduced.

The direct-pay tax credits will reduce the cost of co-ops’ projects by at least 30%, Gutierrez said. Co-ops must comply with wage and apprenticeship requirements, and there are additional bonus credits that may be available that would increase the amount of the tax credits.

To ensure the integrity of the program, the IRS has implemented a pre-filing registration process, which requires a registration number for an eligible project once it is placed in service and before the direct-pay tax credits are claimed.

Co-ops that want to receive direct-pay tax credits for eligible projects that were placed in service during 2023 should start the pre-filing registration process right away by going through the portal created by the IRS. For 2024 and future projects, co-ops should register once the project is up and running.

“As with any new program, there will be a little bit of a learning curve,” Gutierrez said. “But I think these tax credits will help spur co-op investment in energy technologies.

“A lot of co-ops are already looking at a variety of new energy generation and energy storage projects. They want to use these credits to help offset the costs. And these credits really cover a wide variety of fuel sources, including nuclear plants and carbon capture in addition to the renewables and storage.”

Other highlights of the rule include:

• Both tax-exempt and taxable electric cooperatives are eligible for direct-pay tax credits. Under the final rule, tax-exempt and taxable electric co-ops are considered applicable entities and may file for the energy tax credits, including direct pay.

• Easy filing process. Tax-exempt co-ops will use the familiar Form 990-T to claim the tax credits and taxable co-ops will use Form 1120.

• Excluded from the 85-15 income test. Direct-pay tax credits are excluded from the 85-15 test and will not count against co-ops as they seek to maintain their tax-exempt status and comply with the requirement that 85% of their income comes from consumer-members.

• Allows access for the co-op portion of joint ownership projects. If co-ops build a project with other companies or groups and create an undivided ownership interest, co-ops can apply for direct pay for their portion of the project.

• Domestic content waiver. Treasury implemented a domestic content exception for 2024 if a co-op attests that domestically sourced steel or other components are either unavailable or unaffordable.
  

Visit the direct-pay page on cooperative.com for more information, including registration info for upcoming IRS office hours.