The American Public Power Association recently submitted comments to the Internal Revenue Service in response to the federal agency’s issuance of temporary and proposed regulations for the implementation of elective payment of energy tax credits.
APPA, which submitted the comments on Aug. 14, noted that the Proposed Rule provides the mechanism by which an applicable entity may make an election for elective payment.
“However, there is no indication in the Proposed Rule or other public comments about how and when the Service will act on such an election,” APPA noted.
As an example, it noted that a June 2023 Treasury presentation slide deck provides a hypothetical timetable for an applicable entity to make an elective payment election including when the facility is placed in service, when the entity would complete pre-filing registration with the Service, and the deadline for filing a return to make an elective payment election.
That slide deck, however, only states that payment will be received “after (the) return is processed” with no indication as to when that might occur.
APPA notes that public power utilities typically finance large capital investments with an up-front bond issuance that plays the dual role of covering up-front project costs, but also allowing for the repayment of those costs over time. Tax credit payments that are not received until after project completion will likely require bridge financing before longer-term financing is secured, it said.
“Uncertainty as to the timeframe in which the payments will be made will hinder the assembly of the financial package because it will create uncertainty in the assurances to financiers that the entity can meet financing, funding, and repayment project requirements. This will drive up project costs, perhaps blocking financing entirely, and will reduce the willingness of some to take advantage of elective payment,” APPA said.
For the elective-payment mechanism to be effective, final regulations should provide a timeline by which Treasury and the IRS intend to make elective payments, APPA said.
For example, this could include providing that elective payment will be made no later than 30 to 60 days after the later of (1) the date the applicable entity timely files its tax return electing to receive the applicable credit payment or (2) the due date (without extensions) for filing the return.
Additionally, under the Internal Revenue Code of 1986 and the Proposed Rule, an applicable entity may make an elective payment election with respect to any applicable credit.
Where elective payment was made available to certain existing credits (i.e., Code sections 45 and 45Q), elective payment is effective for facilities “placed in service after December 31, 2022.”
However, in an uncodified provision, the IRA provides that the elective payment provisions are effective “for taxable years beginning after Dec. 31, 2022.”
The Code provides latitude to taxpayers in determining their applicable taxable year, including calendar year, taxable year, and part year taxable years where needed.
Neither the IRA, nor the Code as modified by the IRA, specifically defines “taxable year” for a governmental entity that is not otherwise required to file a return. The Code as amended by the IRA does provide that the due date for an elective payment election is generally the due date for the tax return the applicable entity would otherwise file.
However, section 6417 does provide that for a governmental entity for which no return is otherwise required the due date will be “such date as is determined appropriate by the Secretary.”
In response to Treasury’s request for comments, APPA on November 4, 2022, requested that governmental entities not otherwise required to file a return be allowed to seek elective payment on a rolling basis, akin to the process by which a governmental entity seeks reimbursement of federal excise taxes on a Form 8849, Claim for Refund of Excise Taxes.
The Proposed Rule would require governmental entities not otherwise required to file a return to make an elective payment election by filing a Form 990-T.
Service instructions for Form 990-T establish a deadline for filing the return14 and also establish a taxable year for those filing the return by requiring entities to adopt their accounting year as their taxable year.
“In effect, by adopting the Form 990-T as the mechanism by which a governmental entity not otherwise required to pay taxes may make an elective payment election, the Proposed Rule is also imposing a requirement that a governmental entity that is not otherwise required to file a return must adopt its accounting year as its taxable year for purposes of an elective payment election,” APPA said.
This decision creates a transitional issue where an entity (a) placed a credit property into service after December 31, 2022, but before June 14, 2023, when the Proposed Rule was published, and (b) operates on a fiscal year rather than a calendar year, it said.
Specifically, the problem occurs where the credit property was placed in service after December 31, 2022, but before the entity’s accounting year begins in 2023. As a result, while the credit property was placed in service after December 31, 2022, the Proposed Rule would have the effect of treating the credit property as having been placed in service in a tax year beginning before January 1, 2023.
“Had notice of such a decision been provided prior to January 1, 2023, this could arguably be a justified outcome.”
The IRS has an interest in administrability, including not having to change forms after the fact or to process high volumes of amended returns due to a change in law.
Likewise, with prior notice, an applicable entity would have had known to avoid placing a unit into service prior to the beginning of its newly mandated taxable year. However, this requirement was imposed after the fact and without notice, creating an unjust and unintended outcome.
APPA urged Treasury and the IRS to amend the Proposed Rule to provide transition relief to projects falling into the window of time described above for affected public power entities.
“Specifically, we would encourage Treasury to allow on a transitional basis, a part-year taxable year beginning on January 1, 2023, and ending at the usual end of an entity’s usual accounting year. The Code already accommodates such an approach.”
While it would create some additional administrative burden, this would apply only to governmental entities that are not otherwise required to file a return and so would not require consideration of any amended returns, APPA said.
“More importantly, though, this would provide horizontal equity to all governmental entities. The converse – punishing those that rushed to place energy property in service as intended by this historic policy change – would be unfair and contrary to congressional intent of encouraging rapid and robust use of elective payment.”
Alternatively, such an entity could be allowed to adopt a calendar year taxable year. “The usual concerns with such an approach causing conflict between an entity’s accounting books and tax books simply do not apply where the entity would not otherwise be required to file a return. And again, the Code is expansive, not restrictive, in its flexibility in adoption of taxable years, including a calendar year.”
Along with these topics, APPA also weighed in on a number of other elements of the proposed rule.
In related news, APPA Senior Government Relations Director John Godfrey testified on Aug. 21 at the U.S. Department of Treasury and Internal Revenue Service’s “Public Hearing on Proposed Regulations: Section 6417 Elective Payment of Applicable Credits.”
Among other things, he thanked the Treasury and the IRS for making clear that public power entities, including utility districts, joint action agencies and joint powers agencies, qualify for elective payment and that public power utilities in a co-ownership arrangement with other entities (cooperatives and for-profits) can still claim elective payment for their share of the project.
Godfrey also emphasized the need for certainty and streamlining of the elective payment process, including pre-filing registration of tax credit properties.