IRS Publication 5817-E – Elective Pay for State and Local Governments – In the era of sustainable development, state and local governments are increasingly turning to clean energy initiatives to reduce costs, lower emissions, and promote environmental responsibility. The Inflation Reduction Act (IRA) of 2022 introduced groundbreaking provisions, including elective pay (also known as direct pay), which allows tax-exempt entities like governments to monetize certain clean energy tax credits as direct refunds from the IRS. IRS Publication 5817-E serves as a comprehensive guide to this mechanism, specifically tailored for state and local governments. This article explores the key aspects of the publication, eligibility criteria, eligible tax credits, the application process, and practical considerations to help governments leverage these opportunities effectively.
What Is Elective Pay and Why Does It Matter?
Elective pay is not a standalone tax credit but a payment election mechanism under Section 6417 of the Internal Revenue Code. It enables applicable entities—those that typically do not owe federal income taxes—to treat qualifying clean energy tax credits as payments against tax liability. Since these entities often have no tax due, the IRS issues the credit amount as a refund, effectively providing direct cash support for clean energy investments.
For state and local governments, this represents a significant shift. Traditionally, tax credits were only beneficial to taxable entities, leaving governments and nonprofits unable to fully capitalize on incentives for projects like solar installations or electric vehicle fleets. The IRA changes this by making credits “refundable” through elective pay, helping governments fund projects that align with climate action plans and sustainability goals. For instance, a city investing in solar panels could receive a refund equal to the full value of the investment tax credit, reducing upfront costs and accelerating adoption.
This provision is part of broader efforts under the IRA and CHIPS Act to promote domestic clean energy production and manufacturing. As of 2026, with ongoing IRS guidance and tools like the Pre-Filing Registration Tool, governments have streamlined access to these benefits.
Eligibility for State and Local Governments
According to IRS Publication 5817-E, state and local governments qualify as “applicable entities” for elective pay. This includes:
- States and their political subdivisions (e.g., cities, counties, towns).
- Agencies and instrumentalities of states or subdivisions, such as water districts, school districts, economic development agencies, public universities, and hospitals.
- The District of Columbia.
Eligibility extends to any entity that is tax-exempt and invests in qualifying clean energy projects. However, governments must ensure they meet all IRS requirements, including pre-filing registration and compliance with project-specific rules like prevailing wage and apprenticeship (PWA) standards to maximize credit amounts.
Notably, partnerships involving eligible governments may also qualify if the government entity owns the project and makes the elective pay election. This flexibility allows collaborations with private partners while retaining benefits.
Eligible Clean Energy Tax Credits for Elective Pay
Publication 5817-E references Publication 5817-G for the full list of credits eligible for elective pay. These credits, enacted or expanded under the IRA, focus on renewable energy production, investment, and manufacturing. Below is a table summarizing the key credits, their descriptions, and base credit amounts (as of 2024 guidance, subject to inflation adjustments and PWA multipliers).
| Tax Credit | Code Section | Description | Base Credit Amount |
|---|---|---|---|
| Production Tax Credit for Electricity from Renewables | §45 (pre-2025) | Credit for producing electricity from renewable sources like wind, solar, geothermal, and biomass. | 0.55 cents/kWh; up to 2.75 cents/kWh with PWA. |
| Clean Electricity Production Tax Credit | §45Y (2025+) | Technology-neutral credit replacing §45 for clean electricity production post-2024. | Consistent with §45 rates. |
| Investment Tax Credit for Energy Property | §48 (pre-2025) | For investments in renewable energy projects including solar, wind, storage, and biogas. | 6% of basis; 30% with PWA. |
| Clean Electricity Investment Tax Credit | §48E (2025+) | Technology-neutral investment credit replacing §48 post-2024. | 6% of basis; 30% with PWA. |
| Low-Income Communities Bonus Credit | §48(e), §48E(h) | Additional credit for small-scale solar/wind in low-income areas or on Indian land (application-based). | 10-20% increase on base ITC. |
| Credit for Carbon Oxide Sequestration | §45Q | For capturing and sequestering carbon dioxide. | $12-36/metric ton; $60-180 with PWA. |
| Zero-Emission Nuclear Power Production Credit | §45U | For existing nuclear facilities producing electricity. | 0.3 cents/kWh; 1.5 cents/kWh with PWA. |
| Advanced Energy Project Credit | §48C | For advanced energy manufacturing projects (allocated via application). | 6% of investment; 30% with PWA. |
| Advanced Manufacturing Production Credit | §45X | For producing clean energy components like solar panels and batteries. | Varies by component. |
| Credit for Qualified Commercial Clean Vehicles | §45W | For purchasing commercial electric or fuel cell vehicles. | Up to $40,000 ($7,500 for lighter vehicles). |
| Clean Hydrogen Production Tax Credit | §45V | For producing low-emission hydrogen. | $0.60/kg (scaled by emissions); increased with PWA. |
| Clean Fuel Production Credit | §45Z (2025+) | For producing clean transportation fuels like sustainable aviation fuel. | $0.20/gallon ($0.35 for aviation); $1.00/gallon with PWA. |
Bonus credits, such as those for energy communities or domestic content, can increase these amounts by 10-20%.
The Pre-Filing Registration and Elective Payment Process
To claim elective pay, governments must follow a structured process outlined in Publication 5817-E:
- Identify Qualifying Projects: Select projects that generate eligible credits, ensuring they are placed in service (operational) before registration.
- Determine Tax Year: Align with your fiscal or calendar year to meet filing deadlines.
- Pre-Filing Registration: Use the IRS Energy Credits Online (ECO) portal to register each project. Provide entity details, credit information, and project specifics. Obtain a unique registration number (required for filing). Registration must occur before the tax return due date.
- File Tax Return: Submit Form 990-T (Exempt Organization Business Income Tax Return) by the due date (e.g., May 15 for calendar year filers, with extensions available). Attach the relevant credit form (e.g., Form 3468 for investment credits) and include the registration number. Electronic filing is recommended.
- Receive Refund: The IRS processes the return and issues a refund for the credit amount as an overpayment.
First-time filers for 2023 projects (calendar year) have until November 15, 2024, including an automatic extension. Governments not typically required to file returns must still submit Form 990-T for elective pay.
Key Considerations and Best Practices
- Compliance and Documentation: Maintain records to substantiate credits, including PWA compliance for higher rates. Non-compliance can lead to credit denial or recapture.
- Deadlines and Planning: Registration and filing timelines are strict; plan projects accordingly. For fiscal year filers, due dates vary.
- Partnerships and Transfers: Governments can transfer credits to taxable entities under Section 6418, but elective pay is often preferable for direct control.
- Resources: Consult IRS Publication 5884 for the Pre-Filing Registration Tool User Guide, and Publication 5902 for authorization management. Additional guidance is available on IRS.gov/cleanenergy.
Experts recommend consulting tax professionals to navigate complexities, especially for large-scale projects.
Conclusion
IRS Publication 5817-E empowers state and local governments to actively participate in the clean energy transition by accessing direct refunds for tax credits. By understanding eligibility, eligible credits, and the process, governments can reduce energy costs, meet climate goals, and foster economic growth. As the IRA continues to evolve, staying informed through official IRS resources is crucial for maximizing these incentives. For the latest updates, visit the IRS website or consult a qualified advisor.