Center for American Progress

Maximizing the Benefits of Direct Pay for Clean Energy Tax Credits

Maximizing the Benefits of Direct Pay for Clean Energy Tax Credits

To fully realize the potential of direct pay and maximize the deployment of clean energy tax credits, the Treasury and IRS must make the program as accessible as possible.

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Photo shows tall white wind turbines rising above a green forest with a small house and power lines in the foreground.
A wind farm sits idle in Santa Isabel, Puerto Rico, September 2022. (Getty/Jose Jimenez)

The Inflation Reduction Act, the Biden administration’s historic climate plan, creates and expands on dozens of clean energy tax credits to drive renewable energy deployment and make progress toward U.S. climate goals. This deployment has been paired with further incentives to grow the economy from the bottom up and middle out by creating hundreds of thousands of new clean energy jobs, strengthening domestic manufacturing and supply chains, and investing in communities.1

The Inflation Reduction Act allows for elective pay, a tax credit monetization option commonly known as “direct pay.” Direct pay makes these clean energy tax benefits available to those historically excluded from claiming them—such as state and local governments, nonprofit organizations, rural electric cooperatives, public utilities, and many more.2 Since these tax-exempt and governmental entities are not subject to federal income tax, they could not previously claim the credits, meaning these benefits would only be available to private energy developers. In changing this, the direct pay provision finally puts tax-exempt and governmental entities on a level playing field and offers a tremendous opportunity to expand the reach of clean energy incentives.

The direct pay provision finally puts tax-exempt and governmental entities on a level playing field and offers a tremendous opportunity to expand the reach of clean energy incentives.

On June 14, 2023, the U.S. Department of the Treasury and the IRS released proposed regulations detailing guidance and rules for administering elective pay.3 They are accepting comments until August 14, 2023, and it is crucial that stakeholders engage in the comment process to ensure that these programs are as accessible and effective as possible.

Specifically, the Treasury and the IRS should consider the following recommendations to maximize the accessibility and reach of these tax credits.

1. Provide robust technical assistance and education

Entities claiming direct pay—state, local, Tribal, and territorial governments, as well as nonprofits and other public entities—will be filing tax returns and engaging with parts of the federal tax system for the first time. Direct pay is a complicated mechanism, and without robust and meaningful technical assistance, entities that cannot afford to hire tax lawyers or other support services will be at a disadvantage navigating the system. This outcome would work against the intent of direct pay, which is to make the tax credits widely accessible and available to a range of new entities.

As such, the Treasury and the IRS should:

  • Publish materials that are substantive but still easy to navigate, such as a checklist that lays out the concrete steps entities need to take to claim credits. These materials should be published in multiple languages.
  • Host or fund tax clinics and webinars to assist entities and provide education. For example, the IRS partially funds the operation of low-income taxpayer clinics.4
  • Ensure that there are IRS staff available to answer questions via email or phone call.
  • Work and coordinate with other agencies, such as the U.S. Department of Energy, that may be able to further fund and provide technical assistance to new entrants.
  • Simplify the required forms to ensure the process is straightforward and easy to navigate.

Providing technical assistance, education, and outreach will be critical to increasing the uptake of direct pay and ensuring that this opportunity is known and available across the country.

2. Release detailed guidance on the domestic content requirements

Tax-exempt and governmental entities claiming investment and production clean energy tax credits via elective pay must fulfill domestic content requirements; beginning in 2024, those credits will be reduced and eventually eliminated if entities do not abide by the requirements.5 The statute requires that the Treasury and the IRS issue waivers for exceptions based on unreasonable cost or nonavailability of domestic materials and components. However, the released regulations do not provide information on meeting the domestic content requirements, nor do they discuss the waiver process.

First, the Treasury and the IRS must address the domestic content requirements and give further clarity, guidance, and education to entities on how to meet these requirements. Calculating whether a project meets domestic content requirements is no simple task, and the Treasury and the IRS must give clear steps and instructions for entities to meet and calculate their domestic content.

The Treasury and the IRS also need to discuss how they will handle the waiver process should an entity be unable to meet the domestic content requirements. The waiver process should not be overly burdensome on the entities claiming direct pay or on the IRS. However, it is crucial that the IRS does not trivially issue waivers that undermine the domestic content requirements, which support domestic manufacturing jobs and strengthen supply chains for clean energy technologies.

The Treasury and the IRS may decide to issue categorical waivers for materials and components that have been rendered eligible for an exemption, which may help alleviate capacity constraints and make the waiver process more efficient. It is crucial that this process is thoroughly reviewed and vetted. Specifically, the Treasury and the IRS should follow the model laid out by the Build America, Buy America Act waiver process,6 by which categorical waivers must be consistently reviewed and time limited—for example, one year maximum. Furthermore, waivers should not be renewed without an additional full assessment considering developments in the sector. The Inflation Reduction Act makes historic investments in bolstering manufacturing capacity for domestic clean energy supply chains, so fast-paced growth can be expected in both the availability and affordability of materials.

Overall, categorical waivers may help ease the process of issuing exemption waivers, but such waivers must be time limited, and assessments must be conducted rigorously and consistently to prevent abuse.

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3. Allow entities to claim direct pay on amended tax returns

The Treasury and the IRS should allow elective payments to be made on amended returns, enabling taxpayers to make corrections to their tax returns.7 Again, entities engaging with elective pay will be new to this type of tax process. Disallowing amended returns would mean that if entities missed the deadline or caught an error on their filing, they would miss out on the entire tax credit in the case of an investment tax credit (ITC), or one year of the production tax credit (PTC). This is overly strict and an unreasonable requirement for new entrants. These barriers could prevent entities with fewer resources or less knowledge of the system from benefiting from the credits.

4. Allow territories to claim direct pay on ITCs by waiving Section 50(b)(1)

In its proposed regulations, the Treasury and the IRS ruled that territory governments and tax-exempt organizations in the territories are only eligible for PTCs, and not ITCs.8 This is because of an existing provision of the Internal Revenue Code, Section 50(b)(1),9 which generally states that ITC property cannot be used predominantly outside the United States unless the property is owned by a U.S. corporation or U.S. citizen. The definition of the United States and U.S. citizens, in this case, excludes U.S. territories and their residents, which, in effect, prevents governments and tax-exempt entities in the territories from claiming direct pay on ITCs and other credits.

The Treasury and the IRS should waive the Section 50(b)(1) provision that prevents these entities from receiving elective pay on tax credits under sections 48, 48E (the ITCs), 30C, 45W, and 48C. The Treasury has the authority to do so, as the direct pay statute states that the Treasury shall issue “guidance as may be necessary to carry out the purposes of this section.”10 The Treasury has already used this authority to clarify that territory governments are generally eligible for direct pay; it should now clarify that governmental entities and other tax-exempt groups operating in the territories are eligible for the full menu of clean energy credits.

Notably, preventing entities in the territories from receiving the ITCs leaves major disparities in the implementation of the Inflation Reduction Act, as there are several crucial benefits in these tax credits that PTCs cannot provide. For example, those entities would not be able to receive any tax credits for energy storage or microgrid controllers, as those credits are only available under the Section 48 and 48E ITCs.11 This would be a lost opportunity for territories such as Puerto Rico, whose grid has been struck by natural disasters and is in need of renewable deployment paired with energy storage to rebuild and increase resilience of their grid.12 Deploying solar microgrids has become an essential component of Puerto Rico’s strategy to reliably provide power when a power outage occurs due to increasingly frequent and severe hurricanes.13 Furthermore, territories would lose access to unique credits, including electric vehicle charging infrastructure and low-income community bonuses, which are vital for achieving energy equity and meeting Justice40 goals.

Ensuring that territories have full access to the ITCs and the suite of tax credits provided for elective pay is within the Treasury’s authority, is consistent with the intent of the direct pay provision, and would ensure that there is equity and parity for all U.S. citizens.

5. Allow direct pay for partnerships made up of eligible entities

Under the proposed rules, partnerships between entities would generally not be able to claim direct pay, but the Treasury and the IRS are soliciting further comment on the issue. The Treasury and the IRS should allow partnerships between two eligible entities that are each already eligible for direct pay. This could take the form of a partnership between nonprofit organizations and local governments, for example. These partnership structures would help increase capacity as well as aggregate knowledge and tax experience across the organizations, giving eligible entities more flexibility to develop projects and making clean energy credits more accessible and available to these entities.

Learn more about direct pay


Direct pay is an enormous opportunity for governments, nonprofit organizations, rural electric co-ops and public utilities, and many other tax-exempt entities. It creates brand-new opportunities for these entities to fully benefit from clean energy tax credits for the first time, accelerating the deployment of clean energy and bringing its numerous economic, health, and climate benefits to communities. Yet for this program to reach its full potential, the Treasury and the IRS must provide assistance and support to those claiming direct pay and work to make it highly accessible.

The author would like to thank Russell Mendell from RMI and the Climate Tax Project team at the New York University Tax Law Center for their contributions to this issue brief. 


  1. Will Ragland and Ryan Koronowski, “Biden Administration Investment Tracker,” Center for American Progress, June 15, 2023, available at
  2. Rachel Chang, “Understanding Direct Pay and Transferability for Tax Credits in the Inflation Reduction Act,” Center for American Progress, June 5, 2023, available at
  3. IRS, “Section 6417 Elective Payment of Applicable Credits,” Federal Register 88 (118) (2023): 40528–40558, available at
  4. IRS, “Low Income Taxpayer Clinics,” available at (last accessed July 2023).
  5. Legal Information Institute, “26 U.S. Code § 6417 – Elective payment of applicable credits,” available at (last accessed May 2023).
  6. The White House, “Build America, Buy America Act – Federal Financial Assistance,” available at (last accessed July 2023).
  7. IRS, “Topic No. 308, Amended Returns,” available at (last accessed July 2023).
  8. IRS, “Section 6417 Elective Payment of Applicable Credits.”
  9. Legal Information Institute, “26 U.S. Code § 50 – Other special rules,” available at (last accessed May 2023).
  10. Legal Information Institute, “26 U.S. Code § 6417 – Elective payment of applicable credits.”
  11. Legal Information Institute, “26 U.S. Code § 48 – Energy credit,” available at (last accessed May 2023).
  12. Bonnie Krenz, “Building a Better Energy Future in Puerto Rico,” Center for American Progress, September 26, 2018, available at
  13. Javier Rúa Jovet and Tierney Sheehan, “Hurricane-Proof Energy for Puerto Rico,” RMI, October 27, 2022, available at

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Rachel Chang

Policy Analyst, Domestic Climate


Domestic Climate

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